Holly Cook: Welcome to the Morningstar series, Ask the Expert. I'm Holly Cook, and I'm joined today by Jackie Beard, Director of Closed-end Fund Research at Morningstar, to talk about some of the key topics on boards' agendas.
Jackie, thanks for joining me.
Jackie Beard: Hi, Holly.
Cook: So fees are something that's always on Morningstar's agenda and we're hearing that investment trust boards are also looking at this. What specifically is the key issue that they're talking about?
Beard: Well, I think they're recognizing that, whereas historically investment trusts have always been perceived to have that cost advantage relative to open-end funds, that's now disappearing and being eroded, because with the introduction of RDR and all the clean share classes, there is pressure on fees generally across the industry. So, it is really something that they need to address now.
Cook: So you just mentioned that investment trusts have been known for their low-cost advantage. Are you saying that's no longer the case? From an investor's point of view, can they no longer expect that from an investment trust?
Beard: I don't think so, especially with the rise of passive investments, which are charging a fraction of the cost. We are seeing the clean share classes come in, particularly for platform dealing, there is pressure everywhere. So, boards really need to take this onboard, and think actually we need to do something at our trusts as well.
Cook: So what are these trust boards actually doing then to address the fees?
Beard: Well, so far in the last probably two years I'd say, we have seen 10 funds scrap their performance fee. That's great. It's simplicity. It's recognising that we're no longer in that bull market phase of back in the 2000s, where everyone could charge two and twenty. Those days have gone. We’re seeing a lot of simplification, but we're also seeing some tiered structures come in, so this is where they can pass on economies of scale.
I’d highlight – two particular companies spring to mind, so Aberforth, who run U.K. smaller companies money, and Baillie Gifford as well. And they're recognizing that whilst they might not have the biggest pot of assets in that particular fund or trust across their desk or across their firm, they run a lot of money in those strategies. So, actually they can pass on some economies of scale. That kind of thing is really good to see. It’s very shareholder friendly. It doesn't hurt the asset manager, but actually it really, really benefits the shareholder.
Cook: So the way that this works is that as they manage more money, as the assets grow, they will drop the fee for the investor?
Beard: That's right. So, investment trust shareholders can benefit from growth across the business by those economies of scale being passed on to their fund, even though their own fund can't grow, because of course it's closed ended.
Cook: So there's 10 trusts that you said have dropped their performance fee. It sounds like there is more to be done though?
Beard: There is always more to be done, right. We can always see fees come down. Probably two that spring to mind, so Templeton Emerging Markets (TEM), BlackRock World Mining (BRMW), both very good funds, we have very positive views in them both, but in both reports we cite the fact that these firms are running a very big book of assets in these particular strategies.
With ongoing charges of both these funds, sort of 1.3, 1.4, we really think that could be a little bit of economy of scale passed on to their shareholders, clearly because they run so much in their strategies of the firms.
Cook: So in summary then, fees continue to be something that investment trusts are looking at, and they are under pressure from the passive funds to try and make sure that they're being as shareholder friendly as possibly, but there is always more to be done.
Beard: Absolutely.
Cook: Great. Well, thanks very much for joining me, Jackie.
Beard: Thanks.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
