Invesco is making a mockery of shareholder democracy

Invesco’s beauty parade turned ugly

I spent some time this week discussing how best to attract a broader group of people to work in the financial industry. How can one challenge the view that, say, the fund management profession is laddish, overly mathematical, greedy, exploitative, entitled and pathetically socially unaware?

This should be easy. A good job in fund management is as much about behavioural finance as numbers. It can be done part-time or inside set hours, and is one of the few professions that gives people a genuine opportunity to have a real governance impact (via effective ownership of corporate Britain).

But it isn’t easy, for the simple reason that enough of the industry behaves badly enough, often enough and publicly enough to tar everyone with their sticky brush. You will probably all have your own list of maddening examples of this (do send them in). But for me, the recent dispute between the directors of the Invesco Perpetual Enhanced Income Trust (IPE) is a classic of the genre.

One reason I like investment trusts as an asset class is because they have proper boards of directors who run the companies for the benefit of shareholders — doing the compliance, and hiring and firing the asset management firms they feel can run the money best.

Invesco is fighting dirty

So I was pleased when the directors of the IPE asked Invesco, the fund management firm it had been employing, to reduce the fees it charges for running the assets in the trust.

Invesco was charging the trust 0.9% a year (very much at the high end in the world of modern investment trusts) plus an annual performance fee. Add in other costs, and the total ongoing charges for the trust in 2017/18 came to 2.15% (the market average is less than 1.5%, according to the Association of Investment Companies).

Between 2007 and 2017, Invesco’s management fees for IPE amounted to more than £12m. Its long-term performance is admittedly very good — over the past decade, IPE has delivered a total return of 95.6% to investors, far more than the 30% average for funds in its sector. But £12m is just too high — particularly for a bond fund with a market cap of only £120m.

The directors were therefore quite right to want to see the costs reduced and have asked their fund managers to produce a new proposal. The fund managers were then perfectly within their rights to say no (unless you are a man working at the BBC, you don’t usually have to take a salary cut if you don’t want to). They did — and resigned.

So far, so fine. What happened next was not fine. In the wake of Invesco’s resignation, the directors should have held a “beauty parade” — asking other fund managers to pitch for the business instead. A cheaper one would have been chosen, and the money moved from Invesco. Job done.

Invesco’s ugly parade

However, that is not quite what has happened. The directors did have a beauty parade (in which Invesco could have participated to remake its case, but did not). They also found good managers prepared to do the job for much less (the lowest fee offer was 0.35% and the highest 0.65%). But then Invesco stepped in.

It called for the directors who challenged its fees to resign; new ones to be hired (they have even proposed candidates); and a shareholder vote on the matter to be held in July.

You might think that this would be totally beyond its control, given that Invesco is a contractor to the business, not the majority owner.

But it turns out that Invesco, via holdings in its other funds, controls 16.8% of the shares in IPE itself. Assuming Invesco intends to use these voting rights, it could get the board it wants, and keep on managing the trust — and charging fees. This is potentially shocking stuff.

If Invesco wins the day, the fees investors are charged should still fall (IPE’s board said that before the resignation, Invesco had agreed cut its fee to 0.77%).

Assuming it succeeds, the fund management firm’s behaviour will nonetheless have displayed pretty much every unattractive characteristic on offer in the industry. If Invesco uses its clients’ voting rights on the IPE shares, this could disadvantage those very same clients by keeping fees higher than they would have been otherwise.

In that event, one can only wonder how those clients might feel if they knew that they had been used by their fund manager as a weapon against their own interests. Hello greed, exploitation and entitlement (Invesco may have another interpretation for any such behaviour but I can’t present that here, as the company declined to talk to me when I outlined this potential scenario).

Retail shareholders have no voice

However, the key point in this dispute is about shareholder democracy.

Invesco has the support of a few other institutional shareholders (who I assume have confidence that Invesco can continue to keep up this level of investment performance to compensate for higher fees). This takes the level of the potential vote it controls up to 23%. With that, small as it sounds, they could easily win, because as Winterflood Securities puts it, “a significant element of the register is held through platforms [ie by small retail investors] and so will prove difficult to corral”.

Retail investors don’t hold the shares directly, so they won’t vote. The rise of the investment platform (wonderful as it is to be able hold shares in such a simple way) has robbed individual shareholders of their ability to participate easily in this kind of thing.

If those individual shareholders could have their say, Invesco would not (I think) be in with a chance. I have hopes that this situation will soon change — the technology exists to make it possible.

But in the meantime, if you hold units in a fund that holds IPE, do write to, or email, Invesco’s client relations manager via its head office in Henley-on-Thames and complain about your votes being used like this. And if you hold them directly, call your platform and ask how you can use your vote.

There may be rights and wrongs on both sides in this dispute that we don’t know about yet, but the lack of voice ordinary shareholders will get in its resolution is a very, very bad thing. Shareholder democracy really matters.

• This article was first published in the Financial Times

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