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

As managers introduced clean fund structures on their open-ended funds, they set the base fees quite low and, in some cases, lower than the fees they charged on equivalent closed-end funds.

One instance brought to my attention was BlackRock World Mining (BRWM). The base fee is 1.3% on gross assets for the investment trust and the ongoing charges were 1.4% for the year ended 31 December 2012. The base fee on BlackRock Gold & General , the open-ended equivalent, was 1.75% (and this may continue for small investors) but post-RDR, larger investors can pay a clean fee of 1% (ongoing charge 1.19%).

I know some investors in BRWM are quite upset about this state of affairs and so it was curious that the BRWM’s recent chairman’s statement drew attention to RDR.

This said: ‘We hope that, over time, more investors will see the attraction of investing in investment trusts which have the ability to gear to enhance overall returns and which, unlike open-ended funds, are a quoted security which can be readily traded in the stock market,’ but did not mention the issue of fees.

To be fair, BRWM is not the only fund where investors are now faced with a choice between an investment company and a cheaper equivalent open-ended fund.

As an example, the two Baillie Gifford Japan trusts charge 1% on net assets but the open-ended funds charge 0.65% on a clean basis.

While we are in the throes of the shift to post RDR pricing, some of these anomalies are going to slip under the radar but it seems likely to me that investors in closed-end funds will become quite vocal about this as the year progresses.

Can managers argue that closed-end funds are harder to manage and so they deserve additional fees? Yes, there are some complexities – the interaction with an independent board, the intricacies of managing gearing and managing the discount for instance – but the cost of these to the manager is minimal.

The argument used to be that closed-end funds were more valuable to investment managers than open-ended funds because the revenue stream generated by them was more secure, and therefore investment managers were comfortable with the idea that base charges were lower on these funds.

It will be interesting to see whether charges will end up being the same on both kinds of funds or whether that argument will reassert itself. I argued in this column back in November 2011 that, if designed carefully, performance fees are a desirable feature of overall fee structures, and they should be the norm rather than the exception.