For observers of the closed-ended space, planned fee reductions by one of the UK’s flagship investment trusts serve as a reminder that there is “no alternative” to competing with other offerings on price. But doubts remain over whether this will be viable for all trusts, and whether further cuts across the space will be enough to challenge open-ended products.
Last week Baillie Gifford set out plans to move the Monks Investment Trust to a tiered fee structure, with the vehicle’s annual management charge falling to 0.33 per cent from 0.45 per cent for assets above the £750m threshold.
Monks joins a swathe of trusts – nine in total – reducing fees this year. And while some of this is part of a longer game of post-RDR catch-up with open-ended vehicles, other factors are expected to accelerate the trend.
Part of the pressure for investment trusts stems from the fact that, despite differences in structure, they are likely to be compared on price with open-ended funds – themselves being forced to lower charges. Last year a number of asset managers, including Kames Capital and Franklin Templeton, opted to cut fees on certain equity funds, with the former saying charge reductions on its UK Equity Income fund would help it remain “competitive”.
The heavy onus on price was reiterated earlier this year, with Morgan Stanley Research findings suggesting the traditional correlation between a fund’s performance and its inflows was breaking down, as buying decisions were more centred around cost.
As such, the expectation is that fee reductions in the closed-ended space are only set to continue, and potentially at a greater rate than their open-ended peers.
John Newlands, head of investment companies research at Brewin Dolphin, warns: “Investment trusts need to be mindful that they are going to be compared with open-ended funds. They do have advantages such as boards, but if they are not going to compete on costs, they will lose ground and discounts will open up.”
Alan Brierley, an analyst for Canaccord Genuity, produces an even starker message, claiming there is now “no alternative” to fee reductions as investment trusts look to remain competitive.
But Mr Brierley and others are aware of the barriers to cost reductions, pressures for which are unlikely to go away. One particular obstacle lies in scale, or the lack of it. Some of the more notable fee alterations have come from investment trust mainstays, such as the Monks and Scottish Mortgage offerings, both of which are run by Baillie Gifford.
In these cases, a lowering of charges looks more sustainable, and palatable, given the huge quantity of assets under management and economies of scale achieved by such companies. Monks is £1.5bn in size, while Scottish Mortgage, which recently entered the FTSE 100, has £4.8bn of assets.
Not all investment trusts opting to reduce fees this year are so large. BlackRock Emerging Europe, for example, has less than £200m in assets. But specialists wonder if other small players will be able to make such changes.
David Thomas, chief executive of Seneca Investment Managers, says: “It’s more difficult for smaller investment trusts to go down that route. I don’t think there’s a higher level of cost to either vehicle [open- or closed-ended], but it’s easier to compete on price when you have scale.”