Quilter Cheviot said there is “room for improvement” across corporate governance practices of alternative investment trusts, after its thematic review of the sector highlighted a lack of diversity on boards and shareholder engagement.
During the second phase of Quilter Cheviot’s long-term investment trust engagement, it met with chairs and other non-executive directors of 27 alternative investment trusts within the infrastructure and private equity sectors, as well as other asset classes. Its aim was to provide each investment trust with a red, amber or green rating on three criteria: board composition, board effectiveness and disclosures.
Only four investment trusts qualified for a green rating in each of the categories, while one received a red rating across the board.
While board composition scored the highest number of green ratings (67%), a lack of independence, manager representatives, poor oversight and lack of diversity meant it also scored the higher proportion of red ratings, with 22% receiving this rating.
Quilter Cheviot said board effectiveness also showed room for improvement, with fewer than six in ten (59%) trusts receiving a green rating. The firm said some boards had poor communication with shareholders and lacked insight into shareholder sentiment. Less than half (48%) of boards scored a green rating for both board composition and board effectiveness.
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.
“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.”
According to the wealth manager, alternative investment trusts were deemed to be ahead of the wider market when it came to responsible investment disclosures, with almost a fifth (19%) of boards scoring a green rating and just 7% receiving a red rating. However, nearly three quarters (74%) were given an amber rating due to a disconnect between responsible investment processes and the disclosure of such activities.
Nick Wood, head of investment fund research at Quilter Cheviot, said that alternatives have become a crucial component for clients looking to generate diversified real returns, but acknowledged that these asset classes can be complicated and difficult to manage.
“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 it performs. We want to see trusts communicate clearly and effectively with us, especially around issues pertaining specifically to their structures,” he said.