Invesco puts foot down on fee pressure

Invesco has announced it is stepping down as investment manager on the Invesco Perpetual Enhanced Income trust, in a shock move that is being put down to a clash with the board over performance fees.

Invesco trust chair faces removal over fees fallout

The board of the investment trust, managed by bond duo Paul Causer (pictured) and Paul Read, said the split was due to a breakdown in contractual arrangements.

A Numis analyst note attributed the relationship breakdown to a disagreement over performance fees. It noted performance fees have fallen out of favour with retail and private wealth investors “partly because they make fee comparisons more difficult”.

Numis Securities head of investment companies research Charles Cade said: “[Invesco] have just put their foot down and said ‘enough is enough’.”

Jason Hollands, managing director at Tilney, said: “It is certainly unusual for a fund manager to serve termination notice on an investment company mandate which effectively means Invesco are firing their client.

“These things usually happen the other way around and so the inference here is that there has been a difficult discussion around the contract.”

Currently investors pay 20% for outperformance over Libor +1%, reducing to 10% for shareholders’ funds in excess of £80m.

Numis said they understood Invesco was “reluctant to resign from the mandate”, but that “the fund receives a significant amount of management time, and is unwilling to continue as manager on revised management terms proposed by the board.”

It continued: “There has been considerable pressure on management fees in recent years, but as far as we are aware, this is the first investment trust manager that has resigned solely on the back of fee discussions.”

The ongoing charges figure (OCF) for the investment trust in the last financial year to September 2017 was 1.22% or 2.15% including the performance fee. “That looks high,” Cade said, noting almost half came from performance fees.

The board said it plans to initiate a process through JPMorgan Cazenove and seek proposals from potential managers.

Cade said: “At that size it’s probably appealing to quite a lot of managers.” He said investors should probably sit tight until there’s more clarity about the manager, also noting Invesco Perpetual could remain on after further negotiations.

The board said further announcements on management arrangements will be made in due course.

Fee structure

Over a one-year, three-year and five-year period, the trust outperformed its IT Global Income benchmark, with returns of 10.1%, 25.6%, and 75.3%, compared to 7.9%, 20.3% and 25.8%, according to FE.

The £132m investment trust, which trades at an 8% premium, represents a small portion of assets compared to the approximately £30bn managed by Causer and his team.

But issuing equity is difficult on fixed income products, Cade said. “You’ve then got to invest that capital to deliver the same yield.”

It currently has a management fee of 1.0% on the first £80m of net assets, 0.7% on the next £70m, and 0.6% on net assets exceeding £150m, according to Numis.

Performance fees are subject to a number of constraints and include:

  • The performance fee payable in respect of any year will not exceed the aggregate base management fee paid in that year
  • The performance fee will only be earned if total returns exceed 7% for the year and a NAV high watermark is surpassed.
  • For each year in respect of which a performance fee is earned, 30% of the fee will be deferred, and only be payable subject to the company surpassing a NAV high watermark in any one of the next three accounting periods and maintaining a dividend pay out of at least 5p per share for each accounting period up to the crystalisation of the deferred payment.

Numis said in its research note: “We would argue that a low base fee combined with a well-structured performance fee rewards a manager for delivering outperformance rather than growing assets, which should align their interests with shareholders.

“The key is that a performance fee is not excessively generous and does not simply reward higher risk.”

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