Fuddy duddies should shake-up their trust fees

The high-profile activist battles of 2015 need no introduction, and next year may well bring more of the same.

As broker Winterflood recently noted, no fewer than a third of all trusts are currently trading on discounts of more than 10 per cent to NAV.

It’s all a far cry from the predictions being made a few years back.

This, after all, was supposed to be a time of triumph for the sector.

The unbundling of open-ended fund charges would make trust fees look more attractive – at a time when a bull market has underlined the benefits of gearing – heralding a surge in popularity.

But while it is true the sector has prospered from its new-found status as home to a range of alternative investments, and flows from retail clients appear healthy, investor interest hasn’t quite taken off the way many expected.

Trusts’ continued absence from many platforms may partly explain that, as may the rise of model portfolios which sometimes find it hard to accommodate closed-ended vehicles. There is little trust boards can do about that. What they can do, I think, is to put more pressure on management fees.

A fresh shake-up on fees would show investors that boards are focused on improving their lot Dan Jones

To be clear, this pressure is already being applied to an extent: witness the number of trusts to have scrapped performance fees in the past 18 months, for example. But going further will require boards to recognise that they are, in effect, institutional investors – and they have the pricing power to match.

This dynamic is already partially in evidence for some of the sector’s largest portfolios.

Scottish Mortgage, for example, has an ongoing charge of just 0.48 per cent, a figure that has been falling in recent years. What of others, though?

Even those with far smaller pools of capital than Scottish Mortgage’s £3bn should be aware that being able to direct £100m or £200m to a fund group brings with it significant benefits.

Every board should be considering this fact when management contracts are up for renewal – not least because the trend for open-ended fees to fall has very much stalled this year.

It is now more than five years since Peter Hargreaves infamously claimed investment trust boards were helmed by “fuddy duddies”, but his characterisation still looms large over parts of the sector.

A fresh shake-up on fees would show investors that boards are focused on improving their lot, and further set trusts apart from their open-ended competitors.

Dan Jones is editor of Investment Adviser