Analyst view: Investment trust fees are rising

This is not unusual – a part of the industry is often using the argument over fees to try and push its own particular product.

Perceived wisdom is that investment trusts are cheaper investment vehicles than open ended funds, and produce better performance after fees. Much evidence supports this.

The situation, however, is not that straightforward. Investment trust sector fees are going up.

This is a reflection of an increase in the use of performance fees in the sector, as well as increased costs such as director remuneration.

Costs are, in our opinion, likely to rise further. The demands of the RDR on investment trusts encourage them to spend more money on marketing to capture the potential new business from clients of IFAs who have previously not invested in the sector.

We think the inherent conflict between the fund platforms and the investment trust industry will remain an insurmountable stumbling block for all except the largest trusts and industry groups.

Furthermore fees for open ended funds, investment trusts’ most direct competitors, are coming down, as fund management groups launch lower cost funds.

Open ended funds should also become cheaper as commission is removed.

Therefore, the case for investment trusts being the cheapest active investment option will be seriously challenged in the future.

What can the mainstream investment trust sector do? One of the first things should be to look at trusts’ corporate governance.

Often regarded as a positive for the sector, all aspects to do with the trust’s board should be given close scrutiny. I am often told by board members that they offer good value for their annual payment of £20,000-30,000, and that they have to read a lot of paperwork for the four or five meetings a year they attend, which is very time consuming.

With some notable exceptions, we think many offer poor value for money and in some cases are not representing the needs of shareholders particularly well. Many of them do not even own a meaningful stake in the funds they represent. This needs to change.

The sector is often stated to be dying. It is not, but it certainly needs to evolve. Sub-scale funds should be wound up or investors offered a viable alternative option.

Finally, shareholders should put continued pressure on those in the sector who are either trading on past glories or give endless promises of jam tomorrow.

The very best trusts are better than anything that can be found in the open ended world. Some listed hedge funds, for instance, are run by absolutely world class companies.

They generate returns to shareholders after fees that even the most ardent critic of the industry could not argue with.