The effect of corporate governance on UK investment trusts

The presence of investment trusts on the financial market dates to the mid-1800s. Their resilient survival over the years has allowed investors to benefit from their advantageous closed-end structure. Nevertheless, these funds have been in the spotlight in recent years due to the discount puzzle, whose source is yet to be determined concluded. In this study, we have focused on the effect of various corporate governance characteristics on the performance of equity-focused investment trusts in the UK through 2000-2017. The performance of these funds has been measured using both accounting-based ratios such as ROA and ROE, and discount—which is a market-based measure of the deviation of the share price from the NAV. In the last chapter, we focused on the total expense ratio and further untangled the fee by concentrating on the two largest contributors of fees which were management fee and administrative fee.
The presence of female directors, age and tenure are aspects of corporate governance that have received little attention in the context of investment trusts. Thus, our observation in this study help contribute to the literature. We observe a positive and significant relationship between both accounting-based measures, ROA and ROE, and female directors. When the market-based performance measure, discount, is used, however, we do not get a similar result. Female directors who were appointed two years ago on the board of directors do not have an impact on the current discount. Our findings also shows that older directors help enhance the performance of the funds, whereby both ROA and ROE were increased whilst discount was reduced. Longer tenure appears to be detrimental to investment trust performance.
We found a positive and significant relationship between performance and NEDs. The appointment of one more NED on the board led to an increase in ROA (1.12%) and ROE (1.23%). There was a similar observation when discount was used, it was shown that more NEDs on the board reduces the deviation between NAV and share price (β=-0.0222,p<0.001). On the other hand, as predicted, an increase in remuneration of the directors lead to poor performance, measured by ROA and ROE. When analyzing ownership, it was shown that while director ownership had no effect on performance, substantial ownership resulted in a higher ROA and a lower discount. When employing the dummy variables, auditor tenure, and shares repurchases, also helps reduce the discount level. However, we found no significant results for accounting-based measures.
In the final chapter, we focus on the fees charged by the investment trusts, mainly focusing on the TER (Total expense ratio), management fee and administrative fee. We observe a positive and significant relationship between fees and board size, female directors, and age of the directors. We do not observe any significant results for neither tenure of the directors nor ownership. It was shown that only board size had some impact on management fee, there was an increase of 0.05% in management fee when one more director was appointed on the board. Finally, we observe that larger and older funds have better performance and lower fees compared to their younger counterparts.