James Daley: Old boys' network alive and well in the investment trust industry

In spite of the regulator's many attempts to clean things up, the financial services industry is still depressingly riddled with bad practice. But it's not very often that you see the apparent incompetence coming from within the mechanisms which were designed to protect consumers.

In spite of the regulator's many attempts to clean things up, the financial services industry is still depressingly riddled with bad practice. But it's not very often that you see the apparent incompetence coming from within the mechanisms which were designed to protect consumers.

But it happened this week, as some 20 directors across four venture capital trusts (VCTs) collectively decided to sack their funds' investment manager in what appears to be a shameless bid to save their jobs. Given that independent trust directors are appointed for the sole purpose of looking after their shareholders' best interests (not their own), this will be a hard decision to justify when the regulator comes knocking at their door.

Unlike unit trusts and other open-ended funds, VCTs and investment trusts are not owned by the fund management companies. So, if their performance lags, their independent directors have the right to demand changes and, ultimately, sack the management. Although this is seemingly what transpired this week - as the directors of Murray VCTs 1, 2, 3 and 4 replaced Aberdeen Asset Management with Close Brothers, blaming Aberdeen's poor performance - the truth is far more straight forward. For almost nine years, the Murray VCTs were consistently the worst performing trusts in the sector, in which time the funds' directors did nothing to turn the tide.

After some pressure from shareholder groups last year, Aberdeen (not the directors) finally took the initiative and sacked its long-serving fund manager, John Simpson, replacing him with the well-respected private equity guru Bill Nixon. Since then, things have been looking up. And while Nixon and his team may have a tough job ahead, they are surely the right men for the job. But the twist came in one final Aberdeen proposal. To save on costs, it decided to look at merging the four funds - a move that would be great for investors, but would see most of the directors lose their jobs. No sooner had this proposal hit the table, than the 20 directors were clicking their heels and switching the management contracts elsewhere.

After stomaching nine years of underperformance, and not lifting a finger, we're now supposed to believe that the directors suddenly developed a conscience (personally, I'd sooner believe Elvis is alive and well and living in Peckham). But even if this was true, its decision to sack Aberdeen only months after it made a number of improvements to the funds' management simply makes no sense.

While Tuesday's announcements from the four trusts boasted a "unanimous" decision from the directors, it was surely no coincidence that one director resigned from two of the boards the next day "on a point of principle".

Although the Murray trusts may have only a few hundred investors, this is yet another example of bad practice in the VCT and investment trust sectors, much of which continues to operate through the old-boys' network. While many investment trusts continue to underperform, very few boards are willing to rock the boat and change managers. And when they do, it's inevitably for all the wrong reasons.

While the Murray directors may get away with what appears to be blatant self-preservation, I hope their decision is subject to intense regulatory scrutiny. It's easy to understand how the financial services industry has such a bad reputation.

* If I get another press release about St Valentine's Day, I think I'm going to spontaneously combust. Quite why financial PRs think that 14 February is the most important day in the financial calendar is beyond me. Over the past week, I've received news of a survey revealing that 54 per cent of people wouldn't kiss anyone at work; a warning to get insurance if I'm given diamonds by my Valentine (unlikely); and advice not to get too carried away because the average wedding costs £17,000 (bet you Charles' and Camilla's will cost a few bob more). So this is what your banks, building societies et al spend their profits on: commissioning trivial surveys. My best financial advice for St Valentine's Day is: stay in and avoid it. I've yet to receive a press release that concurs, however.

Incentives essential for strong saving culture in UK

It was good to see Interactive Investor (iii) giving Gordon Brown a hard time about Isas this week - a campaign which has lost most of its steam since the Treasury gave some concessions in its pre-budget report in December.

In a letter to the Chancellor, iii points out that, in spite of a welcome commitment to keep the annual Isa limits at £3,000 for cash, and £7,000 for stocks and shares, the Treasury is still providing no incentive for those on lower incomes to invest in equities.

Scrapping the dividend tax credit last year has ensured that equity Isas are now really only a tax-planning tool for the middle classes.

Tax breaks should, of course, not be the main reason for putting your money in the market, but it's amazing how much difference a small incentive can make. The cost to the Government would also be marginal.

Ten years ago, investors could save some £12,000 a year tax-free - and the dividend tax credit ensured that the tax breaks were worth it, even for savers on the lowest incomes. But during the past eight years, £12,000 has been reduced to just £7,000 - and the Treasury won't even commit to that for any more than another four years.

Such directionless policy-making has helped half the savings ratio since New Labour came to power, and sends all the wrong messages to investors at a time when the Government needs, more than ever, to establish a strong savings culture in the UK.

j.daley@independent.co.uk