For a mutual fund to put its fund-holders interests above all ought to be straightforward; but for the largest global asset managers, many of whom are publicly-listed giants with trillions of dollars of assets under advisement, this becomes a far trickier issue. Who do they answer to: the investors in their shares, or their customers who buy their products and services?
By Jon “JB” Beckett, Chartered MCSI
UK Director, Association of Professional Fund Investors
This isn’t some abstract corporate governance issue for contemplative review, but something that the newly constituted boards of UK mutual funds are going to have to grapple within a very practical way, as the Financial Conduct Authority (FCA) has made it clear that fund managers are agents of their investors (clients), as not just of the product providers. And from all accounts, as they outline the findings of the recently released Asset Management Market Study (AMMS), they don’t think the fund managers have been doing a very good job in this regard.
Unlike owning shares in a company, mutual fund shares do not convey the holders any voting rights upon or rights to the profit or assets of the holding company. Voting is typically restricted to issues such as prospectus changes, corporate actions like fund mergers and changes of investment aims and more often than not are typically voted on by the nominee companies on behalf of the end-investors. In a closed-ended fund the trust is the company and so fund-holders are the shareholders. In a defined benefit scheme the fiduciary aspect rests with the scheme appointed trustees. Institutional investors hold little sway over mutual funds and hence why often they instead create mandated segregated accounts to exert more control. That does little for those not in such privileged position – and the ones that the FCA now wants the industry to pay more attention to.
Happily, this is also an issue that is central to the Financial Reporting Council’s 2018 UK Corporate Governance Code. It aims to put the relationships between companies, shareholders and investors at the “heart of long-term sustainable growth in the UK economy”. The reform of UK scheme trustee boards and UK fund boards, to include independent directors (similar to the US model), by the Department for Work and Pensions and FCA, is also an opportunity to change the relationship between fund-holders and asset managers, and to address the lack of voice for fund-holders and the balance of interests with shareholders.
Regulators can go further. Give fund-holders rights to vote on key issues, on par with shareholders, such as executive and fund manager remuneration is critical to transparency, corporate governance and fund-holder interests. We can look to how closed-ended investment trusts are run, and in parallel create a code that obliges nominee companies, pension scheme trustees and institutional investors to contact their investors (or at least better disclose) is key to long term engagement.
I look to the teachings of luminaries like Con Keating and his work on contractual fund rights. Firm-level customer pledges such as at asset manager Hermes also help narrow the gap but they largely remain a minority. In the meantime, to be a professional fund investor is to act as a fiduciary bridge for clients. Professional fund investors work tirelessly to discharge that duty; selecting asset managers, conducting due diligence, negotiating fees, engaging managers and divesting if asset managers fall short. Yet there is no universal standards for the profession (yet).
At the Association of Professional Fund Investors we are committed to defining these standards, globally. Until then buying a fund remains caveat emptor.
Hardly in need of an introduction, Jon Beckett, or JB as he’s affectionately known by all, is a veteran fund selector and strategist with 20 years’ industry experience. JB is a thought leader in the fields of fund strategy, research and governance. Author of the controversial book ‘#NEWFUNDORDER’ and co-author of the WealthTec Book, JB is a guest lecturer, speaker and columnist on fund management, Environmental Social Governance and technology issues. JB is a director of the Association of Professional Fund Investors (APFI), Founder of the New Fund Order consultancy, Ambassador of the Transparency Task Force and external specialist for, and Chartered Member of, the Chartered Institute for Securities and Investments.