Changing its asset manager gives an investment company the sometimes much-needed opportunity for a new strategy and a fresh start.
Last year, eight investment companies in the City changed asset managers, including Baillie Gifford China Growth Trust, Edinburgh Investment Trust and Temple Bar Investment Trust.
City A.M. caught up with some of them to find out what the key considerations are for investment firm boards to ditch their asset manager and, most importantly, how they ensure the best outcome for their shareholders in the long run.
In this 2-part series, we zoom in on the reasons behind the need to ditch the manager of an investor’s assets (today), while tomorrow we discuss the communication with shareholders during that change, and how to recognise and identify what shareholders really want.
For a starter, boards have a legal responsibility to protect investors’ interests. Importantly, they select the asset manager, monitor performance and can change the manager if performance falls short.
“For a period, performance of the trust had been worrying, said “Arthur Copple, chair of the Temple Bar Investment Trust
Therefore, when Alastair Mundy, the named fund manager, retired the board decided to assess whether the new management arrangements were still in the best interests of shareholders.
“The first step was to assess whether Temple Bar’s value investing strategy remained the most suitable one for shareholders while simultaneously looking to find out what our shareholders wanted,” Copple explained.
The board engaged Stanhope, an independent third party, to analyse whether or not value had had its day and if the approach was still suitable for shareholders.
“Following Stanhope’s independent review and advice, the board decided to stick with the value approach but change the fund manager,” he said.
Susan Platts-Martin, chair of Baillie Gifford China Growth Trust, recognizes some of these experiences.
Whilst overall performance was good, she stressed that performance over one, three and five years had slipped below the firm’s benchmark and the share price was persistently below the net asset value.
“As an actively managed investment vehicle we felt we had to outperform, albeit not necessarily every year, but that if relative performance did not improve within a reasonably short timeframe, then action needed to be taken,” Platts-Martin noted.
Since the outbreak of the pandemic, investment company boards have been highly critical, under pressure and proactive given the challenging and volatile market conditions.
In addition to the eight investment companies which changed their asset manager, last year 32 boards negotiated lower fees for shareholders, around a tenth of the entire investment company universe, according to recent data from City-based Association of Investment Companies (AIC).
Ten companies wound up and returned capital to shareholders while two well-known investment companies in the Square Mile merged.
“The main issue for us was the delay caused by Covid and the eventual realisation we needed to proceed with online meetings and discussions rather than face to face,” Platts-Martin said.
“Once we had decided on the process, we followed a fairly well trodden path in terms of inviting and reviewing proposals.”
A unified front
Suarez stressed that,when making any decision which will affect shareholders, it is critical for there to be consensus on the board and it is important that you give this time to form.
“Once there is that consensus, the next step is to get independent advice, which then empowers the board to make the best decisions in the interests of shareholders,” he shared.
“When searching for a new manager for Edinburgh Investment Trust, a priority was finding a manager capable of managing a company of this size,” Suarez pointed out.
“All boards understand that managers underperform from time to time. The key challenge for a board is to identify what is temporary underperformance, and what is structural underperformance,” he added.
Tomorrow part 2, in which the investment managers zoom in on how to present and communicate big changes to shareholders.