Emma Wall: Hello, and welcome to the Morningstar Series, 'Ask the Expert'. I am Emma Wall and I am joined today by Morningstar's Jeremy Beckwith.
Hi, Jeremy.
Jeremy Beckwith: Good Morning.
Wall: I wanted to talk today about a subject close to your heart, the development of investment trusts and how over time they have become even more competitive with fees and even giving an even better offering to investors. So let's start with RDR. I think most people know how it's had a positive effect on unit trusts, but then that, of course, has a dominant effect on closed-end funds.
Beckwith: That's right. One of the things about RDR was that financial advisors had to make an assessment based on all the products available in the market and this included investment trust which previously they didn't tend to look at. So, if financial advisor want to be seen as giving independent investment advice, they do have to show that they've taken into account the possibility of investing into investment trusts which has given at least some sort of boost to the idea that more people can be looking at investment trusts.
Wall: Why were advisors not investing in investment trusts in the first place?
Beckwith: Because probably they are little bit more complicated than straight-forward open-ended funds. The price you pay is not necessarily the net asset value which is generally is with open-ended funds, and so you can make or lose money independent of the way which underlying funds are acting because of the share price that is paid in the market.
Wall: So more inflows into investment trusts which are great and more people having the option to invest in closed-ended funds, it's also had an impact on price. Hasn't it?
Beckwith: It has, because RDR meant that the pricing of open-ended funds became more transparent and a lot of these were bundled up inside the AMC, the annual management charge were charged by the funds, not all of which went to the fund companies themselves, they went to pay the distribution chain.
With this piece sort of made more open, it's now apparent that. Whereas before investment trusts appeared to be cheaper than open-ended funds, actually the asset management charges on open-ended funds actually now look cheaper than investment trusts, and so we're beginning to see some clear downward pressure on the pricing with investment trusts.
Wall: I think there has been around 80 investment trusts who have cut that fees since RDR was introduced. I think there are sort of half a dozen this year alone, which is not bad one a month?
Beckwith: No and that's right. Six this year have been eliminating or reducing their performance fee structures, and that's something that Morningstar has been very keen to try and highlight that the performance fee structures didn't necessarily were to the benefit of the end investors, and so we've seen six this year that are rather been severely reduced or eliminated entirely.
Wall: I suppose in theory performance fees work, because skin in the game, you'll incentivize people to do better, but it is a little bit more complicated than that, isn't it, because sometimes the outperformance didn't have to be that much in order for performance fee to start eating in. They were no caps. They were sort of weird stepping structures and we actually prefer simplicity when it comes to those things.
Beckwith: Absolutely, simplicity is really good. I think that's a very basic thing that actually, investors think they are paying investment manager to actually outperform in the first place, so why they have to pay another performance fee on top. And also, performance fees tend to be a one-way option, if things go well for the investment manager, they get a bit more money, but if things go badly, they don't seem to lose out. They still get their base fees and the investors take all the hit.
Wall: And it's not just fees where investment trusts are sort of innovating and coming forward into the future, is it? Boards are taking a much more dynamic role in making sure that end investors get the best possible product when it comes to close-ended fund?
Beckwith: I think that's right and I think that the pensions de-regulation we've seen in the U.K. in the last year or so has been an important catalyst to helping Boards to really feel what are we about, what are we trying to do, who are our investors, what are we trying to achieve? And so we're beginning to see now that Board's recognized that more and more investors are looking for, what we call Pension decumulation products, which is how the people sort of get money back out to their pension pot, mostly in form of income.
So there are more and more emphasis on generating income, generating sustainable income, and so the Boards are looking at their mandates and their objectives in the light of changing – sort of what's going on in the marketplace. So there has been – Boards had a much busier time I think in the last couple of years and we are seeing signs of action and change there.
Wall: Jeremy, thanks you very much.
Beckwith: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
