Investment Trust Insider: How the RDR could hinder not help trusts

The premise of the retail distribution review (RDR) was that it promised to level the playing field versus open-ended funds for the closed-end fund industry, bringing with it swathes of potential new clients.

At the margin, I think there are encouraging signs the audience for closed-end funds is expanding. We have to be careful, though, that in adapting to this exciting new world we do not lose some of the best aspects of the old one.

For me, two areas of concern are emerging.

The first was highlighted in a recent online article by Wealth Manager’s Sarah Miloudi. Some trusts have adopted zero or near zero discount policies, and pressure seems to be growing on others to follow suit. These discount control mechanisms offer some comfort to investors unused to dealing with discounts but blur the line between open-ended and closed-end funds.

One of the core attractions of closed-end funds is that their managers can take a longer-term view, to the benefit of performance, because they do not have to worry about unpredictable cash flows coming in and out of the fund.

Zero discount policies work wonderfully when trusts are in demand but could force the sale of assets in depressed markets when a trust falls out of favour, to the detriment of ongoing shareholders.

Offering investors the choice of an exit via regular tenders (anything from semiannual to five yearly, depending on the fund’s investment strategy) and moderating discount volatility with share buy-backs seems like a better idea.

All things being equal, any rational investor would choose a fund with low fees over one with higher fees. In real life though, all things are not equal and differences in investment performance dwarf the impact of fees.

Direct comparisons

However, levelling the playing field post-RDR does facilitate direct comparisons between open and closed-end funds managed by the same manager. In some cases, the closed-end fund industry seems to be coming up short.