A ‘wake-up call’ for closed-ended funds

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Investment Trusts - October 2016

A ‘wake-up call’ for closed-ended funds

A number of investment trusts have lowered or scrapped their performance fees this year – or otherwise altered the charges they had previously passed on to investors.

This shake-up among some of the oldest investment companies is in response to the increasing pressure on active managers to compete with the lower costs levied by passive providers.

Nineteen investment trusts have either reduced their performance fee for the year to date or announced changes to their charging structure, according to the Association of Investment Companies (AIC).

When the boards of the Baillie Gifford Japan Trust and the Edinburgh Worldwide Investment Trust agreed to reduce the management fees on both trusts this year, James Budden, director of retail marketing and distribution at Baillie Gifford, suggested the investment trust industry “has to take the initiative if it wants to compete in the new world of transparency and clarity of costs”.

James Glover, client director at JPMorgan Asset Management, believes: “There will be continued discussions about fees and, in a low-return environment, that’s not a surprise. If returns are going to be 5 per cent per annum instead of 8 per cent per annum and you’re charging a hefty fee on that, then it’s a much bigger percentage of someone’s total return.”

He admits: “For wealth managers and advisers explaining to clients exactly what they’re paying, it’s really difficult to say, ‘I’m going to charge you ‘x’ per cent, the fund manager will charge you ‘y’ per cent, oh and there’s an extra per cent you may or may not get charged, I don’t know what it is and it will depend on the performance’.”

One trend that seems to be emerging is the adoption of a tiered fee structure based on net assets. The AIC points out that of the 19 trusts lowering fees, around half are using a tiered approach where the charges reduce as the assets get bigger.

The Finsbury Growth & Income trust, for example, introduced a tiered structure this year that will reduce fees to 0.54 per cent per annum if the market cap exceeds £1bn – fees are currently 0.6 per cent. 

But there are many investment trusts yet to respond to demand from the retail investment community for more competitive fees and charges.

Research by Canaccord Genuity, ‘Adjusting to a world of lower numbers’, sets out that while lower returns prevail, ongoing charges will have “a much greater dilutive impact” on returns, particularly over the long term, and “warrant even greater scrutiny”. The report features 51 directly comparable investment trusts and open-ended funds and reveals only 45 per cent of closed-ended funds now have a lower ongoing charge.

Alan Brierley, director, investment companies team at Canaccord Genuity, notes: “Encouragingly though, we also found that a majority of investment companies have outperformed comparable open-ended funds (using an institutional investor fee) and benchmarks during the five years to September 30 2016. This contrasts with the poor performance of the wider active management community.”