Investment trust charges are on the decline

Investment trust charges are on the decline

Investment trusts, savings vehicles that were invented in the Victorian era, have certain tools in their armoury that sets them apart from unit trusts or Oeics.

One of the often cited advantages is that investment trusts, on the whole, are cheaper than open-ended funds. This, however, is no longer necessarily the case, due to rules introduced over five years ago, which banned commission payments for financial advice and resulted in a proliferation of commission-free clean share classes. Some fund managers took the opportunity to reduce their charges, which is why some are now lower than those of similar investment trusts.

To move with the times, and with a view of trying to retain their historic competitive advantage over open-ended funds, various investment trust boards have moved to cut fees since the start of 2017. In total, 19 investment trusts have altered their management fees, most notably Scottish Mortgage, which now has a tiered fee scale, charging 0.3 per cent on the first £4 billion of assets under management, but then falling to 0.25 per cent thereafter.

Monks, another trust in the Baillie Gifford stable, has also moved to a tiered fee of 0.45 per cent on the first £750 million of assets, dropping to 0.33 per cent thereafter. Previously the charge was 0.45 per cent, while the total assets stand at around £1.5 billion. In a similar move two JP Morgan trusts, JP Morgan European Smaller Companies and JP Morgan Japan Smaller Companies, also introduced tiered fees that have resulted in lower charges for their respected shareholders.

In the first quarter of the year other notable trusts to cut fees include Keystone (from 0.6 per cent to 0.45 per cent) and BlackRock Emerging Europe (from 1 per cent to 0.8 per cent).

More recently, within the last three months, Lowland has altered its fee structure. Previously the trust charged 0.5 per cent, but has now reduced this amount to 0.4 per cent on ‘net chargeable assets’ over £375 million. As at the end of April net chargeable assets stood at £423 million.

Elsewhere, Templeton Emerging Markets has introduced a tiered fee structure, of 1 per cent of net assets up to £2 billion and 0.85 per cent thereafter. Previous a fee of 1.1 per cent applied.

Schroder Asia Pacific, Montanaro UK Smaller Companies, JP Morgan American and Genesis Emerging Market have also cut charges.

Analysts, including Canaccord Genuity’s Alan Brierley, welcomed the fee cuts, adding that economies of scale should be passed on to investors.

‘With lower ongoing charges for open-ended funds, the seemingly inexorable rise of passive funds and strong demand for alternatives representing an increasingly hostile competitive environment for equity investment companies, we believe it is critical that these companies remain cost competitive,’ he says.

He adds: ‘We expect to see more companies move to a tiered fee structure; if economies of scale are not passed on, shareholders are entitled to ask why not?’

In the case of open-ended funds, investors are failing to benefit from a reduction in management costs due to scale. But, over time, this could change after the Financial Conduct Authority (FCA) took umbrage with the issue. In its final report into the asset management industry the FCA made the point that retail investors fail to benefit from economies of scale.

In its report, the regulator called on fund managers to ‘strengthen their duty’ to ‘act in the best interests of investors’. In addition, it hinted at future plans that may force fund managers into making their fund objectives and aims clearer and more useful for consumers.


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