Calls for investment trusts to scrap performance fees

A leading analyst has called for investment trusts to drop performance fees entirely, after six boards have scrapped the charges since the RDR.

Stephen Peters, investment trust analyst at Charles Stanley, said trusts “need to make themselves more appealing” by cutting performance fees.

Last month, Henderson’s City of London trust became the latest in a slew of investment trusts to remove its performance fee, with the board centring the decison on “simplifying these [charges] and making the trust more attractive to a wider audience of retail investors”.

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“It would be better if all funds stripped out performance fees,” Mr Peters said.

“If trusts or open-ended funds want to charge a performance fee there should be a lower management fee. In past we have had pretty normal management fees with a performance fee on top, and I just don’t think that is on.

“Managers dress it up saying ‘you are incentivising us and you get 85 per cent of the upside’, [but] the industry should be about enrichment of clients not the enrichment of fund management.”

Mr Peters added that, while trusts are generally cheaper when compared with open-ended funds, that was not often the case when shares were bought through intermediaries.

He argued that, following the RDR, “investment trusts are losing the perceived advantage of being cheaper than open-ended funds”.

Since January, at least six trusts have dropped their performance fees, although two of those were also subject to a management change.

In its latest industry report investment trust analyst firm Winterflood said: “The general theme has been one of simplification and competitiveness with more than one eye on the pricing of open-ended funds.

“Certainly the threat that investment trusts would no longer have the natural advantage of lower fees has been met by a number of funds seeking to remain competitively priced.”

It was widely assumed that the RDR would have a positive impact on the retail sales of investment trusts as open-ended funds were no longer permitted to pay commission to advisers and other intermediaries - something investment trusts have historically not done.

But this effect is yet to materialise, and several of the major platforms and fund supermarkets have dragged their heels on bringing investment trusts within their product offering, adding an extra barrier to the industry’s attempts to attract more retail investment.