Investment trusts adjust fees to improve value
David Prosser on how boards are delivering for shareholders.
More investment trusts are reducing their fees and rethinking the way that they charge investors. Over the past week, both Gresham House Energy Storage and Renewables Infrastructure Group have agreed to move away from levying charges as a percentage of the value of the funds’ assets.
Instead, they will charge a fee calculated with more reference to their market capitalisation. So, when shares in these funds are trading at a discount to the value of their underlying assets, as they usually are, investors will pay less in total fees.
The reductions are part of a wider trend in the investment trust sector that has seen scores of funds reduce their charges in recent years. Elsewhere, in the past few days, Brown Advisory US Smaller Companies has announced reductions in its annual management fees, cutting its headline charges across the board. It joins more than 30 funds that reduced their charges last year. All of which is good news for shareholders in these funds, both today and in the future. But these cuts represent just the latest stage of evolution in investment trust charging practices.
Once upon a time, investment trusts were almost always cheaper than their open-ended counterparts; the latter had to factor the cost of paying commission to financial advisers into their charges, something that investment trusts have never been allowed to do.
A fat lot of good it did the investment trust sector. While its lower fees played a significant part in helping it to consistently outperform, advisers largely shunned investment trusts in favour of open-ended funds prepared to reward them for their business. Investment trusts struggled to assert themselves as a mainstream investment option.
Then, in 2013, regulators levelled the playing field, banning sales commissions of any type on investment products. Open-ended funds started to compete more aggressively on charges, but investment trusts began to gain more traction with advisers and with investors more widely.
Roll forward to today and the whole collective fund sector looks more competitive on costs. You’ll pay significantly lower fees to invest in both open-ended funds and investment trusts today than at any time in living memory. That has been a hugely positive development because every penny of charges has a negative impact on returns, with compound interest multiplying the effect over time.
For investment trusts in particular, adjusting fees represents an opportunity to show accountability to shareholders. As listed companies, investment trusts are ultimately run by independent boards with a legal duty to act in the best interests of shareholders – including getting the best possible deal on charges from fund managers.
The story at Gresham House Energy Storage and Renewables Infrastructure is particularly interesting in this context. Both trusts trade on significant discounts, so by charging with reference to net asset value, the funds have arguably been asking investors to pay for performance they’re not actually seeing in their portfolios.
A switch to a market cap approach links charges to that performance more closely, even if the manager is doing a better job than the share price suggests.
There are arguments either way, of course, but the broader point here is about investment trusts being more responsive to shareholders. And in the longer term, that can only be a positive for investors.
The whole collective fund sector looks more competitive on costs.
David Prosser
Once upon a time, investment trusts were almost always cheaper than their open-ended counterparts; the latter had to factor the cost of paying commission to financial advisers into their charges, something that investment trusts have never been allowed to do.
A fat lot of good it did the investment trust sector. While its lower fees played a significant part in helping it to consistently outperform, advisers largely shunned investment trusts in favour of open-ended funds prepared to reward them for their business. Investment trusts struggled to assert themselves as a mainstream investment option.
Then, in 2013, regulators levelled the playing field, banning sales commissions of any type on investment products. Open-ended funds started to compete more aggressively on charges, but investment trusts began to gain more traction with advisers and with investors more widely.
Roll forward to today and the whole collective fund sector looks more competitive on costs. You’ll pay significantly lower fees to invest in both open-ended funds and investment trusts today than at any time in living memory. That has been a hugely positive development because every penny of charges has a negative impact on returns, with compound interest multiplying the effect over time.
For investment trusts in particular, adjusting fees represents an opportunity to show accountability to shareholders. As listed companies, investment trusts are ultimately run by independent boards with a legal duty to act in the best interests of shareholders – including getting the best possible deal on charges from fund managers.
The story at Gresham House Energy Storage and Renewables Infrastructure is particularly interesting in this context. Both trusts trade on significant discounts, so by charging with reference to net asset value, the funds have arguably been asking investors to pay for performance they’re not actually seeing in their portfolios.
A switch to a market cap approach links charges to that performance more closely, even if the manager is doing a better job than the share price suggests.
There are arguments either way, of course, but the broader point here is about investment trusts being more responsive to shareholders. And in the longer term, that can only be a positive for investors.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
