Invesco Perpetual has resigned as manager of Invesco Perpetual Enhanced Income (IPE) following a dispute with its board over fees. The investment trust is run by veteran bond managers Paul Causer and Paul Read, co-heads of fixed interest at Invesco Perpetual, and Rhys Davies. They will serve out a notice period of 12 months.
The trust's board had been in discussions with Invesco Perpetual since 3 April over the terms of its management agreement but on Monday said it had received a resignation letter from Invesco Perpetual.
"This letter has been sent notwithstanding the detailed and extended efforts of the board to reach satisfactory ongoing contractual arrangements, including in respect of fees payable, for both shareholders and the current manager," said Donald Adamson, chairman of Invesco Perpetual Enhanced Income. "We have engaged with Invesco Perpetual but ended up with a significant divergence of view between us. We were hopeful we would be able to get an agreement up until very recently but they have decided not to continue."
Invesco Perpetual did not wish to comment on the reasons for its decision.
The trust's board is keen to reduce the trust's costs for reasons including that performance fees have become unpopular with investors. Invesco Perpetual Enhanced Income's performance fee is payable at a rate of 20 per cent of outperformance on the first £80m of shareholders' funds and 10 per cent thereafter over a hurdle of Libor plus 1 per cent. The performance fee is only earned if total returns also exceed 7 per cent for the year in question. And it is capped at a maximum of the aggregate base management fee paid in that year.
At present, the annual management fee is 1 per cent, and the trust has an ongoing charge of 1.17 per cent. In the year to September 2017, its ongoing charge was 1.24 per cent, but with the performance fee added on this rises to 2.16 per cent, according to Morningstar.
The trust has also not updated its fee structure since 2014 and the board is mindful of the increased focus on asset management industry fees. "The Financial Conduct Authority has been pretty clear on the direction it wants the industry to go in [on ensuring value for money for investors], particularly those charged with governance of investment vehicles," said Mr Adamson.
The trust's board have also taken into account the prevailing market conditions of the European high yield assets it invests in.
"The performance of European high yield bonds has been pretty good over the last eight to 10 years, and that's something that Invesco Perpetual note too, but with asset values at quite elevated levels, yields are pretty low by historic standards," explained Mr Adamson. "Our trust has a solid portfolio of these assets which have been acquired over a long time and although these have an average duration of 4.3 years they are being replaced with new issues that are at significantly lower coupons."
As a result, if market conditions remain as they are, future returns will be more moderate. And this would mean that the trust's fixed costs eat into a greater proportion of returns.
"If we can address the cost structure, it will improve the dividend cover and improve the sustainability of income we are able to offer," added Mr Adamson.
But a reduction in fees would make running the trust less attractive for Invesco Perpetual.
"It's highly unusual for the manager to fire the client," said Jason Hollands, managing director at Tilney Group. "But Invesco Perpetual have probably looked at this on a commercial basis as they are running assets worth billions elsewhere and servicing a really small trust has costs in terms of managers' time, with board presentations for example. So they may have decided that this isn't enough remuneration for the time they are putting into it."
Innes Urquhart, research analyst at Winterflood Securities said: "While we would acknowledge that boards have a duty to look after the interests of investors, of which negotiating fees is clearly a part, we think that the fund's highly regarded management team will have been a key attraction for the majority of shareholders.
He added that although the trust's fees are on the higher side compared to other listed debt funds this is partly because of its relatively small market capitalisation of about £127m, and the ongoing charge would fall if the trust grows. He also thinks that the performance fee is fairly structured as the trust's managers need to beat a high hurdle before it is payable.
Invesco Perpetual Enhanced Income has performed well under its current management team, with net asset value returns of 23 per cent and 45 per cent over three and five years, against an average of 12 and 23 per cent for listed debt funds. Its share price dropped from 80.2p at close on 20 April, the last trading day before the resignation was announced, to 76.9p by close on 24 April. And its premium to net asset value (NAV) fell from 7.4 per cent at close on 20 April to 3.6 per cent at close on 24 April.
However, Mr Hollands says if you like the trust you could hold it for now. He said: "As the existing managers remain in place for the next 12 months and will want to do a professional job, given it's their track record at stake, there's no further action for investors to take at this stage."
But if you want an alternative Mr Urquhart suggests City Merchants High Yield Trust (CMHY) which is also managed by Mr Causer, Mr Read and Mr Davies. Henderson Diversified Income Trust (HDIV) and CQS New City High Yield Fund (NCYF) also focus on debt and have attractive yields but are trading at higher premiums to NAV.
New managers
The trust's board will seek proposals from potential new managers while continuing to discuss transitional arrangements with Invesco Perpetual. It believes "improved terms from suitably qualified managers" are likely to be available in the market. But the trust's board does not plan to change the trust’s investment policy. "We are not going to do something drastically different," explained Mr Adamson. "We understand why shareholders hold this trust - it's because they want a high level of income."
Since the resignation announcement on 23 April, the trust's corporate adviser, J.P. Morgan Cazenove, has received significant interest from a large number of asset managers. Mr Adamson believes the trust will have a strong field of candidates to consider in the upcoming recruitment process.
The trust's board want to recruit managers with the appropriate expertise to help the trust grow, develop and manage its assets, for a significantly improved fee. And he added that they are not keen on retaining a performance fee.
Invesco Perpetual Enhanced Income is also due to put a continuation vote to its shareholders next year.
"We are optimistic that we will have a good proposal to put to people and we would expect the trust to continue," said Mr Adamson. "We've been trading at a premium to NAV [for the last four years] so for shareholders to want to shut it down would mean they would be voting to lose the value of that premium."
