More proof that investment companies are alive to the competitive threat posed by other types of collective investment vehicle

In this column recently, I highlighted research which revealed that it is no longer safe to assume investment companies are automatically always cheaper than their open-ended counterparts, as was once the case. Now two of the investment companies included in the research have dropped their fees.

Wealth manager Tilney BestInvest had conducted an analysis of 47 pairs of open-ended funds and investment companies run by the same manager and with a similar mandate, and found that in roughly half of all cases, the open-ended fund was actually cheaper. Two of the investment companies in that analysis, Baillie Gifford Japan and Edinburgh Worldwide (also run by Baillie Gifford), have now announced they are to lower their charges.

Both previously charged an annual management fee of 0.95 per cent on the first £50m of assets under management and then an additional charge of 0.65 per cent above that threshold. Both those fees will remain, but the two funds are introducing a third tier of charges, with a 0.55 per cent fee payable on assets above £250m. In the case of Baillie Gifford Japan in particular, which has assets under management of more than £420m, that’s a significant reduction.

Jason Hollands, the manager of Tilney Bestinvest, says it is gratifying to see such an immediate response on charging from the investment company sector. “We suggested that boards should be alive to this [competition on charges] and more assertive in driving manager fees down for their shareholders,” he says. “So it’s encouraging to see that these two boards have announced management fee reductions.”

It’s worth pointing out that these two funds are far from the only investment companies to have cut their charges in recent times. In fact, a string of investment companies have reduced annual management fees over the past two years. We’ve also seen a move away from performance-related fees; these ostensibly align the interests of shareholders and the investment manager but have sometimes been criticised as opaque or undemanding.

Meanwhile, one manager that is still focused on performance fees is Woodford Investment Management – though it has won plaudits for its stance on charges at Patient Capital Investment Trust, launched last year. The fund has an annual fee of just 0.1 per cent, which is enough to cover its basic administration expenses, but charges nothing else unless it delivers compound annualised returns of more than 10 per cent a year.

That’s a bold move (indeed, the fund hasn’t hit its target in its first year), but does deliver obvious value to investors – if they don’t make a decent level of return from the fund, the investment manager doesn’t get paid.

Are we going to see a price war between the investment company and open-ended fund sectors? In truth, it would be preferable for funds and managers to continue competing on the basis of return, rather than fees, though the two are not unconnected. Nevertheless, the focus on charges by increasing numbers of investment companies is to be welcomed. Investors are getting better value as a result.