Let ‘Enhanced Income’ go to the investors
INVESTMENT management is a lucrative industry, generating great wealth for those professionals who are good at it – and, yes, some who are no more than average. As clients, our rewards for giving them money to invest are usually at best modest, although if they grow the value of our investments we are usually content to let matters rest.
Success should always be rewarded, but the suspicion remains that the current balance between the interests of the supplier (investment manager) and buyer (investor) is hugely skewed in favour of the former. As buyers, we win long term – in terms of our investments rising in value – but not as convincingly as we could do if many suppliers did not denude our investment pots so rapaciously.
In recent years, the City regulator has come around to this line of thinking, demanding that asset managers be more transparent about the charges they levy on investment funds.
Buyers of many investments are now presented with documents which give them a clear idea of the charges that will be levied against the fund they are investing in – everything from annual management fees to portfolio transaction costs and administrative expenses.
Thankfully, we have also seen some downward pressure on fund charges. Nowhere is this more evident than in the investment trust industry, where many boardrooms are increasingly flexing their muscles.
There to defend the interests of shareholders (investors), they are persuading investment managers to reduce their charges. Most of the time they are winning. According to data compiled by the Association of Investment Companies, a raft of trusts have tickled down fees since the start of the year, including Aberdeen Japan, Artemis Alpha, F&C UK High Income, Martin Currie Global Portfolio and Monks (run by Baillie Gifford).
Yet not every investment manager is prepared to play ball, as recent events at Invesco Perpetual Enhanced Income demonstrate. Its managers have resigned in a fit of pique after refusing to take a reduction in the fees it draws from the £149 million trust.
As the name implies, the fund provides investors with an attractive income – six per cent plus – from a portfolio of corporate and Government bonds. It does this while attempting to protect investors’ capital.
In Invesco’s defence, the managers have done a more than half decent job, outperforming the FTSE All Share Index over the past five years with a total return of 53 per cent (against the index of 45 per cent). Only in the past year has the fund’s absolute performance – minus 4.4 per cent – slipped.
Yet the rewards Invesco has drawn from the pot are considerable. In the latest accounts to the end of September last year, Invesco earned fees totalling £2,036,000 – comprising a management charge and a performance fee. In percentage terms, the trust’s ongoing charge for the financial year was 1.22 per cent (0.93 per cent of which went to Invesco) and the performance fee was 0.93 per cent. In other words, Invesco earned charges totalling 1.86 per cent. Excessive on any level.
Given the generous size of cake it has been taking, it was only a matter of time before the board, led by Donald Adamson, brought such largesse to an end. A proposal to remove the performance fee and move towards a new management fee of 0.77 per cent was agreed in April before Invesco suddenly announced it would be resigning subject to serving a 12-month notice period. The board immediately moved to find replacement managers, ending up with four City candidates happy to be paid less than 0.77 per cent.
But Invesco has now put a spanner in the works by demanding a general meeting of the trust at which a vote will be held calling for Adamson and fellow director Richard Williams to be replaced. Armed with the power of a 16.9 per cent stake in the trust behind it (held by other Invesco funds), it is confident of winning the day – most small shareholders will find it difficult to vote because their holdings are via fund platforms.
What Invesco intends doing if it wins is anyone’s guess but I imagine it will attempt to cling on to the management contract, albeit on better terms than 0.77 per cent.
Invesco’s behaviour on Enhanced Income does little to enhance its reputation. It is putting its financial interests above those of shareholders. Bang out of order.
The charges are excessive on any level... Invesco is putting its own interests first
jeff.prestridge@mailonsunday.co.uk