Until the arrival of the Retail Distribution Review, investment trusts were often heralded for being a cheaper investment than their open-end peers, albeit not in every case. With the RDR has come a greater focus on fees across all fund structures and it’s no surprise therefore that we’re seeing the price advantage often found in investment trusts erode away, as firms have started to launch clean share classes at their open-end funds resulting in lower headline fees.
However, it’s not just the OEICs at which asset managers are tinkering with fee structures. There have been a number of changes made at investment trusts too, particularly with regards performance fees.
Since launching Morningstar’s qualitative ratings and research for investment trusts in January 2012, we have seen no fewer than seven closed-end funds and their boards scrap the performance fee element of their fee structure and that’s just at the funds where we have awarded a Morningstar Analyst Rating. These seven are all traditional equity funds, too – not funds of hedge funds, or alternative asset classes. This is an excellent demonstration of the value of an independent fund board, as in a number of cases such changes have been driven by the board, as well as the asset manager.
One of the key messages we keep hearing in our work with advisers and investors alike is the need for simplification and it seems that message is being heard.
For example, Harry Nimmo at Standard Life is a well-known and highly respected fund manager, with a stable team thathas produced excellent long-term results at their UK smaller company equity funds. It was something of an anomaly, therefore, that the unit trust version was cheaper than the investment trust, a key contributor here being the performance fee. Granted, the trust outperforms the OEIC over the short, medium and long term, but it made little sense to us that investors in the trust paid a higher fee for the same skillset, even though it came with higher returns, and that’s without the firm paying trail commission to advisers.
Other funds to scrap their performance fee are Bankers Trust and City of London, in the Henderson stable. Granted, neither fund has seen its performance fee trigger in the last couple of years and at both funds the base management fee has been increased by a handful of basis points, which isn’t ideal. But the removal of the performance fee makes for a simplified fee structure under which investors know exactly what to expect from one year to the next.
Also to take similar action was Securities Trust of Scotland. When the fund changed its mandate to global equity income in 2011, Martin Currie and the board agreed to remove the performance fee in a bid to offer simplicity and competitiveness among a sector that has been growing in prominence. They did also increase the annual management fee, which is less pleasing, from 0.3% to 0.6%, but even so the fund is competitive among peers and the lack of performance fee has been well received by shareholders.
As well as the removal of performance fees, we’ve also seen some investment trusts lower their headline annual management charge, in a bid to remain competitive relative to their open-end peers. One such house was Baillie Gifford, which trimmed fees across four of their investment trusts. While the new fee arrangement now has tiered structure, this does at least allow for a reduction in fees as assets increase and economies of scale can be passed on—something that’s rare to see in unit trusts.
Others include Henderson, where they have reduced the headline AMC of their Henderson Far East Income fund by 0.1%; Aberforth has introduced a tiered structure at their UK Smaller Companies investment trust; Fidelity, too, has cut fees at Fidelity China Special Situations, although the performance fee still stands. And while Witan hasn’t cut fees per se, they have simplified the way in which they describe fees so that investors are no longer faced with a half-page description of fees from which they must decipher the costs themselves (the detail is still clearly available for those who want or need it so there’s no issue of hidden costs or lack of transparency).
These aren’t all the changes that have taken place to fees in the last 18 months among investment trusts, there are too many to mention in one article. But the key point is this: investment trusts aren’t afraid to innovate and move with the times in order to ensure that they retain their competitive advantage among peers. Indeed this is testimony to their longevity and survival rate – there may not be a huge universe of funds when compared with unit trusts or exchange traded funds, which see new share classes launched at the drop of a hat, but many of the trusts that exist today have been around for multiple decades. Their names may have changed, their investment focus may even have altered, but with an independent board, the shareholders have been consulted at every step and their interests represented by the directors.
We’d like to see more funds follow suit and simplify their fee structures. The investment world is sufficiently complex already, let’s help investors by keeping—or making—fees simple. It’s one less complexity for them to deal with.
