It was hard to see the logic when the FCA’s Asset Management Market Study virtually ignored the £184bn investment company industry. But the irony was all too clear when the same study proposed that open-ended fund managers should appoint independent directors – one of investment companies’ key benefits.
The requirement for asset managers to appoint at least two independent directors, making up a minimum 25% of the board, comes into force in September. The regulator hopes that this sliver of independence will help asset managers balance the interests of their shareholders with the investors in their funds.
Investment companies, of course, have fully independent boards, and their shareholders and their investors are one and the same. If your aim is to safeguard investors’ interests, the investment company structure is hard to beat, because it’s the directors, not the asset manager, who are in the driving seat. Maybe that’s why it’s lasted 151 years.
But even if the open-ended world is playing catch-up on governance, surely it is moving in the right direction? At the AIC, we have more than 1,000 member directors, so we are the first to appreciate the value of these experienced and often strong-minded individuals. It’s not out of the question that asset managers’ new independent directors could be a force for good. I’d suggest two ways in which we might judge their success, given a year or two.
First of all, how successful will they be in bringing down fees? Since 2013, investment company boards have negotiated 142 fee changes that lower costs for investors. Some of these changes reduced the base fee paid to the manager, others saw performance fees scrapped. There has also been a trend towards tiered fees, passing on economies of scale to investors as assets grow – something alien to the open-ended industry.
Investment company boards, of course, can exert particularly effective pressure because they always have the option of firing the manager. The new independent directors on asset managers’ boards won’t have this nuclear option, but they should not be afraid to raise a critical voice where they feel funds don’t provide value for money.
Second, will the new directors be able to influence the big things – strategy, personnel or structure – especially where a fund is failing?
Examples abound in the closed-ended space. The board of JP Morgan Global Growth & Income transformed the company’s appeal after introducing a 4% dividend target, resulting in the trust moving from a 15.5% discount to a premium. More recently, Aberdeen Standard Asia Focus was overhauled at the board’s request, with Hugh Young named lead manager, a reduction in the number of holdings and a rebasing of the company’s fees. And the merger of two UK smaller companies investment trusts – Dunedin Smaller Companies and Standard Life UK Smaller Companies Trust – was brought about after the boards identified an opportunity to build a bigger fund with more liquidity and lower costs for investors.
None of these wins for investors would have been possible without independent directors. So no wonder the FCA wants to bring those benefits to the open-ended industry. Let’s hope their efforts bear fruit, though the half-heartedness of the initiative two directors on a board of eight may hamper its ability to bring about radical change.
Nick Britton is head of intermediary communications at the Association of Investment Companies
