Investment trusts are of course normal public companies, with a board of directors who are responsible to shareholders. Or to quote from a good article on these long established and low cost investment funds by Ian Cowie in the latest Aberdeen newsletter: “Unlike unit trusts, every investment trust has a board of directors whose duty is to represent the interests of investors rather than any fund management company. Investment trust directors can – and occasionally do – sack fund managers who underperform. No such investor protection mechanism is built into unit trusts“.
At least that is the theory. But the practice is somewhat different as is highlighted by an article in the latest PIRC newsletter. PIRC regularly sends draft reports on companies (e.g. proxy voting recommendations with supporting explanations) to the companies themselves so they can comment before publication. This is of course best practice for anyone intending to criticise a company in public, so as to make sure one has got the facts straight (as ShareSoc did before issuing its recent press release on the revised Hargreaves Lansdown charges, but which unfortunately the blogger who did a hatchet job on Blinkx last week seems not to have done).
PIRC revealed that 66% of the responses received from investment trusts were received from the investment management group, rather than the company directors. I have to say that this is commonly my experience also. When you write to the Chairman of an investment trust (whose registered office address is often than of the fund manager), you often get a response from the manager. This can include telephone calls explaining why you don’t understand the issues from one of the fund managers administrative staff. Even when you get a written response from the Chairman, it often subsequently transpires that it was written by fund management staff.
In essence, the board of directors is often delegating not just the day to day running of the trust to the fund manager, but their handling of corporate governance and strategic issues.
It would be good to have a rule introduced into the UK Corporate Governance Code that stated that the directors should deal with corporate governance questions and matters such as director pay and investment policy in investment trusts. Questions addressed to the directors should be answered by them, not delegated to the fund manager. Otherwise the tail is wagging the dog.
Roger Lawson
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