International Biotechnology Trust – Odd Performance Fee

International Biotechnology Trust (IBT) is an investment trust focussed on the sector suggested by its name. I attended the Annual General Meeting yesterday (13/12/2016) in the City of London at the somewhat inconvenient time of 12.30 pm (and with no refreshments provided, as last year). As I said to the Chairman, I don’t mind them not providing lunch but when they cause me to miss mine, I am not happy. I suggested 2.00 pm in future. They may reconsider.

But the oddest aspect of this company is that last year they paid out a performance fee to the manager when the shareholders lost money. The NAV per share total return fell 1.7% in the last financial year. That compared with a 3.8% fall in the Nasdaq Biotech index so they did better than their benchmark. The company’s share price was down 9.8% (Comment: yes this sector is out of favour at present due to concerns about possible political pressure on drug pricing in the USA). The average share price discount was 13.2%. On a more positive note, the unquoted portfolio grew by 9.5%.

I raised the issue that the performance incentive scheme was peculiar in that last year the investors lost money but the manager got paid a performance fee (£575,000 – see page 19 of the annual report for how calculated – that is because it is based on relative performance to their benchmark index and also separately on the unquoted portfolio). I indicated I did not like performance fees in investment trusts and it would be better to simply pay a higher base management fee. The current arrangement seems perverse and does not align the managers interests with those of investors, which is always claimed to be the purpose of performance fees.

In addition last year there was some discussion about interpretation of the performance fee calculation, but that had now apparently been resolved. It is not uncommon for companies and their directors to have difficulty understanding and interpreting a performance fee calculation. I suspect they are drafted by the fund managers.

But this is definitely a case where the performance fee should be scrapped and replaced by a simple base fee as a standard percentage of net assets. If the fund does well and hence grows in size, the manager will make more money so that is sufficient incentive. And the converse is true – if it does badly they will no doubt get fired. What more incentives are required?#

There is a full report on the AGM on the ShareSoc Members Network.

Roger Lawson

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