Investment Trust Cost Disclosures - a compromise

Differentiating between trusts that hold real assets and listed securities allows more nuanced approach.

Investment Trust Cost Debate: A compromise

Investment Trusts cost disclosure – a modest proposal​

There has been an extensive and well-coordinated campaign to argue that the ongoing costs relative to NAV of investment trusts should NOT be included in EMT (European MiFID Template) data files and hence be excluded from the calculation of aggregated costs (the all-in OCF) of fund-of-funds as per Investment Association guidance.

Both ETFs and Investment Trusts are exchange traded and in both cases, the investor pays the share price, not the NAV, and the ongoing fund management and administration costs are applied to the NAV, not the share price.  For ETFs the premium/discount to NAV is very narrow and relatively stable.  For Investment Trusts the premium/discount to NAV can be wide and unstable.  But all arguments as regards market efficiency being captured in the price are the same for both.

A tale of two funds

So imagine two identical fund-of-funds, A and B, which both cost 0.50% ongoing costs excluding the cost of underlying instruments. 

Now let’s assume that fund A is fully invested in a basket of ETFs and those ETFs have a weighted average ongoing cost (deducted from those ETFs’ NAV) of 0.20%.  The aggregated cost of the fund A would be disclosed as 0.70% (0.50%+0.20%).

Now let’s assume that fund B is fully invested in a basket of Investment Trusts and those Investment Trusts have a weighted average ongoing cost (deducted from those Investment Trusts’ NAV) of 0.75%.  The aggregated cost of fund B used to be disclosed as 1.25% (0.50%+0.75%) under previous guidance, but following the lobbying by the AIC and others is now disclosed as just 0.50% (0.50%+NIL).  The basket of underlying assets is apparently nil cost. Ta-da!

An investor looking at Fund A with an aggregated cost of 0.70% (because it’s full of low cost ETFs) will assume it’s more expensive (there’s less more drag) than Fund B with an aggregated cost of 0.50% (because it’s full of high cost investment trusts, whose costs no longer need to be aggregated).
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This is clearly absurd, and is against transparency (despite claims to the contrary) and creates an unlevel playing field where it is impossible to compare products on a like for like basis.

A backward step for transparency

The successful investment trust campaign is a set-back for transparency.  Why should a fund of ETFs look more expensive than a fund of investment trusts, particularly when the ongoing costs of ETFs are substantially lower than those of Investment Trusts?
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The counterargument – that investors pay the share price not the NAV - applies equally to ETFs.

Differentiated treatment for real assets

Investment Trusts need to decide if they are “just companies” or funds.  As marketed to retail investors, they are positioned as funds.

We do however concur with the campaign group and the Regulator’s proposal that there should be differentiated treatment for Investment Trusts that invest in predominantly real assets (e.g. infrastructure, property, and other real assets). The operating and maintenance costs of those real assets should be excluded from an Investment Trust’s ongoing costs for EMT disclosure purposes.  This will make their ongoing costs look less inflated but nonetheless reflect the running cost of the fund structure, as it should do.
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Indeed a lot of the heat could have been taken out of the investment trust fee debate if this additional nuance was stated upfront (our concern was entirely focused on investment trusts investing in publicly listed securities, NOT on those investing in real assets such as infrastructure).

A compromise position

In what has proved a passionate debate, we propose the following compromise position.

We think it makes sense to differentiate between a) investment trusts that predominantly or exclusively hold real assets (infrastructure, property, wind farms etc) which are more like companies and b) those that hold publicly listed securities (e.g. Japanese equities, or UK large cap equities) which are more like funds.  Cross comparability for the latter relative to alternative fund formats such as actively managed/index-tracking OEICs, Unit Trusts and ETFs is key for consumers and their advisers alike.

With this differentiation made, it is possible to reach a compromise position.
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We concur with the campaign group that for investment trusts predominantly holding real assets, the operation and maintenance costs should be excluded from that investment trust’s ongoing costs for EMT disclosure purposes.

However, we believe that for investment trusts predominantly holding publicly-listed securities, the ongoing costs should be stated on EMT files as they were previously and therefore included in the aggregated costs of fund of funds. We think it is misleading to position them as nil-cost within a fund of funds, and confusing if underlying OEIC and ETF ongoing costs are aggregated but investment trust ongoing costs are not.  By including them again, this enables transparency and cross-comparability for UK consumers and those advising them.

This would restore a level playing field for underlying instrument cost disclosures in the material and important fund of funds sector.
 
The FCA is consulting on this very topic now (CP24/30) and the consultation closes on 20th March 2025.  Have your say!

The Savoy Lunch challenge

Our Head of Research, Henry Cobbe, has offered to buy lunch at The Savoy for anybody who can disprove the statement:
"Comparing two investment trusts A and B with identical holdings holdings and identical gross returns, where Trust A has high ongoing costs as a %NAV, and Trust B other has low ongoing costs as a %NAV, the difference in both a) NAV return after fees, and b) the share price return between Trust A and Trust B will reflect the difference in fees between Trust A and Trust B, other things being equal."
This is why - despite investors paying the price, not the NAV - knowing and disclosing the ongoing costs as a % NAV on KIIDs, on Platforms and in  the aggregated costs of fund-of-funds (as per EMT files) remains an imperative.

Revisit the debate

Henry Cobbe set out his concerns around this in this article for Citywire.
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Ros Altmann set out her rebuttal of Henry’s arguments in this follow-on article for Citywire