Perform or Be Fired, Fund Chiefs Are Told; ADVISERS ARE URGING INVESTMENT COMPANIES TO TAKE ACTION AGAINST POOR MANAGERS; I'm All for Shunting out Poor Managers
Byline: JEFF PRESTRIDGE
DELIVER the goods - or get the sack. That is the blunt message the boards of investment trusts are being urged to send to the fund managers who look after assets in excess of [pounds sterling]83 billion, primarily for ordinary investors.
The call for action has been made in the wake of the recent decision by the board of the [pounds sterling]290 million F&C Eurotrust, led by chairman and industry stalwart Douglas McDougall, to replace Foreign & Colonial as fund manager. McDougall described F&C's investment performance in recent years as 'disappointing'.
F&C, struggling to deliver acceptable returns across its range of funds, has been axed in favour of boutique fund manager Edinburgh Partners, which takes control in February.
Leading investment advisers believe that the chairmen and non-executives of other trust boardrooms should start earning their fees by doing a 'McDougall' and putting non-performing fund managers on red alert that they will be similarly kicked out unless they start to perform.
There are more than 400 investment trusts in total and Financial Mail has identified several that are due a management overhaul (see right).
'Better corporate governance in the boardroom has been one of the dominant themes of this year, especially in the City,' says Saran Allott-Davey, managing director of Heron House Financial Management in Newport, Gwent.
'It should now start being applied more widely in the boardrooms of the country's investment trusts. Investors should not have to put up with indifferent fund management.
'Replacing managers who have failed to perform over a long period is a good thing - it's in the best interests of investors.' Allott-Davey recommends investment trusts to a majority of her clients because annual management charges are typically a third of those on rival unit trusts and Oeics.
Unlike most other advisers, she is not seduced by the commission payments - both upfront and annual - that unit trust groups are happy to pay advisers for recommending their products. These commissions have made unit trusts more popular than investment trusts.
But Allott-Davey says the ability of boardrooms to kick out poor managers makes investment trusts even more investor-friendly.
Such power stems from the fact that trusts are stock market-listed, typically in London, and so have boardrooms made up mainly of independent directors whose role is to look after the interests of investors (the shareholders).
Key to this is ensuring that the investment managers extract the best possible returns for investors.
Managers not performing, such as F&C on Eurotrust, can be sacked. In contrast, there is no such 'independent' check on the management of unit trusts or Oeics with the result that often poor managers are allowed to overstay their welcome.
The requirement for boardrooms to review regularly the performance of fund managers is laid down in the code of good corporate governance set up by trade body the Association of Investment Companies. The code says boards must 'press for remedial action if necessary' where investment performance is unsatisfactory, although it stresses frequent management changes are undesirable in light of the long-term nature of investment trusts.
To date, few boards have been tough on poor performance. John Newlands, investment trust specialist at private client stockbroker Brewin Dolphin, says this is partly a result of the fact that some trust boards 'are not as independent as they should be', resulting in failing managers being allowed to continue running portfolios they should have been relieved of long ago.
'We always look for a feisty, contrarian figure on a board before making an investment trust recommendation, someone who may call time on a non performing manager,' says Newlands.
The most active boardroom has been that overseeing Edinburgh Investment Trust, a fund investing in UK shares. …