Asset managers defend charge disparity

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Asset managers defend charge disparity

Asset managers have defended the difference in fees between open and closed-ended vehicles which have similar investment objectives and are managed by the same teams.

Earlier this month (1 September), Edinburgh-based investment management firm Baillie Gifford decided to cut the fees on two of its investment trusts by adding a new layer to the tiered fee structure which is based on net assets.

Baillie Gifford’s decision to cut the fee on its £422m Japan trust, for example, brings it more in line with the charges for its £1.6bn Japanese fund, which has an ongoing charge of 0.68 per cent. 

The move was heralded by Tilney Bestinvest’s Jason Hollands as “encouraging”.

Mr Hollands, who is managing director of the wealth management firm, produced data which analysed 47 pairs of funds and trusts run by the same teams, where the costs for more than half of the pairs were higher for the trust than the comparable fund.

“Old and deeply ingrained generalised assumptions about different investment structures need to be fundamentally revisited,” he said, pointing to developments over recent years which has seen the removal of adviser commission from open-ended investment vehicles.

Many saw the removal of commission from open-ended funds as an opportunity for the investment company industry</a> to seize a bigger share of the market.

But Mr Hollands said in reality the reforms have also made funds more competitive on costs, posing a new competitive threat.

Investment trusts have their own independent board which regularly negotiate the fee structure, and the Tilney director said one way trusts can demonstrate the benefits of this governance structure is to drive down the fees where they are no longer competitive.

He pointed out that Henderson, for example, have five pairs of products where each is run by the same team and has a similar strategy, but all have different fees, where in three of five cases the ongoing price of the trust was more than the fund.

James de Sausmarez, head of investment trusts at Henderson Global Trust, said the assumption that trusts are more expensive than open-ended funds is “misplaced” because the charges depend on what is “under the bonnet”.

“You have to look at each investment trust individually to understand whether it merits a higher or lower fee,” he said, adding epen-ended charges are “fairly standardised” across the industry.

Mr de Sausmarez defended trust board’s as “more cognisant” of the size of the investment, and as they see the vehicle getting bigger are more inclined to argue the fees should be lower, adding arguably they have a better level of governance because the boards act in the interest of shareholders.

But he admitted there are examples of trusts where the rates are not competitive, and suggested some fees might be based on historic commission.

“Where there are anomalies between closed and open-ended funds, then there is a powerful argument for the boards of that investment trust to have a conversation with its manager [about the fees].”

“The board has a governance responsibility to their shareholders, and if in their opinion the fee is at the wrong level, then they should do something about it.”

He added: “We are all competing for scarce resources, so all investment vehicles want a fee rate that is fair in the market.”

According to the analysis, JP Morgan Asset Management had four pairs of similar vehicles, where in three of the cases the charges for the trust were greater than the comparable fund.

Simon Crinage, head of investment trusts at JP Morgan, said these open and closed-ended funds bear similar investment objectives, but are different products, with differing demands and different servicing models.

“Many investment trusts also utilise gearing, unlike their open-ended counterparts.”

He also echoed Mr de Sausmarez in pointing out investment trust boards exercise independent oversight, hold their managers to account, and have a duty to act in the best interests of their shareholders.

“The management fee arrangements of each of the investment trusts we manage are regularly reviewed by their boards,” Mr Crinage added.

Standard Life Investments also featured in Mr Hollands’ analysis, with two pairs of similar products with different fees.

A spokeswoman from the firm said the different pricing structures of OEICS and investment trusts differ to reflect significant differences in the structures of the vehicles, pointing out, for example, trusts are a more controllable closed-ended structure with no daily liquidity pressure.

“We continually review the charging structures of our range of funds and are committed to offering investors competitive market value.”

katherine.denham@ft.com