13 June 2024
Quilter Cheviot has found the alternative investment trust sector has improvements to make following an in-depth engagement programme designed to improve the corporate governance practices and responsible investment disclosure within the sector.
During this second phase of Quilter Cheviot’s long-term investment trust engagement, it met with the chairs and other non-executive directors (NEDs) of 27 alternative investment trusts within the infrastructure and private equity sectors, as well as other asset classes.
The objective of the engagement was to improve the corporate governance practices and responsible investment disclosure in the investment trust sectors, primarily focusing on three factors:
- Board composition – boards should be independent, diverse and have the right skillset.
- Board effectiveness - boards should have the ability and willingness to challenge the investment adviser when necessary and be accessible to meet with shareholders and open to considering their feedback.
- Disclosures - responsible investment disclosures that are pertinent to the investment trust and provide real-life examples of how the trust approaches stewardship and the integration of environmental, social and governance factors within its investment process.
As with its equity investment trust engagement last year, Quilter Cheviot provided each investment trust with a red, amber or green rating on the three criteria. Only four investment trusts qualified for a green rating in each of the categories, while just one received a red rating across the board.
Board composition was the category with the highest percentage of green ratings, standing at 67%. However, due to a lack of independence, manager representatives, poor oversight and lack of diversity, this was also the category with largest proportion of red ratings, with nearly a quarter (22%) receiving this rating.
Board effectiveness, meanwhile, had room for improvement in comparison to the make-up of boards, with fewer than six in ten (59%) of trusts receiving a green rating. While there were fewer reds, Quilter Cheviot found some boards had poor communication with shareholders and lacked insight into shareholder sentiment. Just 48% of boards scored a green rating for both board composition and board effectiveness.
Alternative investment trusts were deemed to be ahead of the wider market when it came to responsible investment disclosures with 19% of boards scoring a green rating, with just 7% being giving a red grade. However, 74% of the boards were provided an amber rating as a result of a disconnect between responsible investment processes and the disclosure of such activities. However, Quilter Cheviot does note the direction of travel in this space is good.
Last September, Quilter Cheviot reported on the first phase of its thematic engagement, which involved evaluating the equity trusts. Looking at the chart below, there were some discrepancies in the factors assessed. For instance, the alternatives have a higher number of boards that scored green for responsible investment disclosures. However, a lower percentage of boards received a green for board effectiveness. Despite these differences in specific factors, the averages show that both perform similarly, within rounding errors of each other.
Quilter Cheviot will monitor progress of this engagement while also embarking on the final phase with a focus on investment trusts in real estate sector.
Gemma Woodward, Head of Responsible Investment at Quilter Cheviot, said: “As with our equity investment trust engagement, there is room for improvement when it comes to the corporate governance practices of alternative investment trusts. While alternatives span everything from infrastructure to private equity and multi-asset to music royalties, there is common best practice they can all align to that will benefit shareholders in the long-term.
“Clearly investor expectations change over time and what was previously good practice is no longer the case. Indeed, with the likes of responsible investment the pace of change is fast and some can be left behind. This is where activities such as this engagement are meant to be collaborative and ensure boards aren’t falling down when changes can be easily made. We have already seen some really positive improvements from some boards, and we look forward to working closely with the 27 we have engaged with here to help them improve where possible.”
Nick Wood, Head of Investment Fund Research at Quilter Cheviot, added: “As portfolio construction has evolved, alternatives have become a crucial component for clients looking to generate diversified real returns. These asset classes can be complicated and difficult to manage, so it is crucial boards are set up and operating in a way that is going to serve the best interests of shareholders. After all, it is the shareholders they are working on behalf of, not the investment adviser.
“Given the public nature of investment trusts, we place a lot of emphasis on how a trust is managed, as well as how well it performs. We want to see trusts communicate clearly and effectively with us, especially around issues pertaining specifically to their structures – for example, gearing, discount management or performance fees.
“It isn’t the case that alternatives are opaque on these sorts of themes, but shareholder communication needs to improve to ensure investors understand exactly what it is they are buying in to and how they expect it to perform.”
