The open-ended fund world could learn a lot from what has happened with the Alliance Trust.
The victory for shareholder democracy seen with the trust must have been eye-opening for its board and investment managers.
It’s clear a culture of hubris had developed, leading the board to believe investors would simply take its word as gospel no matter what.
In a last-minute interview with Investment Adviser’s sister title FTfm the trust’s chief executive, Katherine Garrett-Cox, had said she was “incredibly confident that we will win on Wednesday”. She refused to accept that performance was poor.
Shortly after she spoke, the deadline for the trust’s retail shareholders to post their proxy votes expired and the board would have been made aware of the results, which likely signalled the very real prospect that a disastrous defeat was imminent.
The shareholders have spoken. Alliance Trust has effectively been placed on a 12-month probation. Change is required.
But in the UK’s multi-trillion-pound open-ended fund world, no such method exists for investors to express their views.
In unit trusts, the trustees oversee day-to-day issues such as accurate pricing and keeping the money safe and segregated. In Oeic structures the only ‘director’ is the authorised corporate director, which has similarly fundamental duties.
In the US, mutual funds have a dedicated board of directors with a number of legal and regulatory requirements. At least 40 per cent of directors on the board have to be independent, but the gold standard there is for two-thirds to be.
These directors look out for conflicts of interest between the fund house and investors, and serve as ‘independent watchdogs’ on behalf of investors.
Where a fund house runs a number of products, costs can be kept down with the use of a pooled board structure enabling one board of directors to oversee a number of sub-funds.
So who is holding UK fund managers to account in funds that charge too much, perennially underperform or simply track the market?
Would a board of directors with a strong independent element have prevented the Arch Cru fund catastrophe?
If the UK fund industry wants to finally silence its critics, it should consider independent representation for investors at the highest levels.
I would argue it should go even further than that and also hold annual meetings for mutual fund investors to express their views and vote on issues such as fund managers’ pay structures and appointments, and the like.
This might work in the fund managers’ favour too, as investors who feel they have a say in how a fund is run might be less inclined to sell out in the event of short-term underperformance.
The fact is that open-ended fund investors are more than just stakeholders – it’s their money. They should be given a voice.
