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The great fees revolution that's skipping investment trusts

There is a fees revolution going on in the funds world, but it seems to have skipped over the investment trust sector.

In the run-up to the retail distribution review (RDR) a host of asset managers have been rushing to roll out low-cost 'clean' share classes, which tyically carry no commission and offer retail investors product access at institutional prices.

Four fund groups - Carmignac, Threadneedle, HSBC Global Asset Management and GLG - have in as many weeks announced their plans for RDR-friendly charges.  

Carmignac has decided to introduce the share classes across its entire Luxemnourg sicav range, while HSBC said all of its passive tools will now carry an annual management charge (AMC) of 0.10%, a reduction of 0.15%.  Threadneedle altered the AMC on 51 of its open-end funds, announcing that from October its typical equity fund will carry an AMC of 0.75%.

By comparison, there is tumbleweed blowing through the investment trust sector, where only a handful of vehicles have moved to improve their charges ahead of RDR.

While a number of sector commentators have said that the RDR will not breed a new and eager generation of trust buyers, others fear that without a change in tack the industry could be left behind.

'We believe that there will be increasing fee pressure on investment companies,' said Numis, a brokerage.

'This situation will be exacerbated by the introduction of new share classes for open-end funds where the headline fee no longer incorporates adviser comissions.'

Although many of the older, global growth trusts typically carry very low management fees, demand for some of these is waning, with the sector's average discount sitting at 8.1%.  Moreover, once the overall charges of the listed structure are taken into acount (stamp duty on new issues and dealing spread), Numis argues the cost advantages of trusts can become 'debatable'.

This is particularly true when performance fees are taken into account and over the past decade a trend has emerged for trusts to introduce these. Typically, performance fees have been introduced alongside a slight cut in the vehicle's base fee, yet these can also be a source of significant upside for the investment manager.

Trail blazing?

Among the few trusts to react to RDR, which comes into force on 31 December, is Standard Life Investments UK Smaller Companies, run by Harry Nimmo.  In July, the basic management fee increased to 0.85%, from 0.65%, however the £150 million fund will no longer carry its 20% of net asset value (NAV) outperformance fee. 

When in force this fee was capped at 0.6% of total assets per annum, and could earn the manager up to 1.25%of total assets (minus current liabilities) in any given year. However Nimmo's Oeic carries an AMC of 0.75%, likely to make it cheaper given that the rise of platforms and discount brokers means that few investors will pay the initial charge.

According to the Association of Investment Companies (AIC), changes like these are actually more widespread than they appear, even if not explicitly linked to RDR.  They are positive for investors because they ensure trusts are offered at a competitive rate versus Oeics.

In addition, the AIC's Annabel Brodie-Smith points out that while cost can be a bone of contention when it comes to any investment, the benefits of the listed structure have to be taken into account.

'Investment company performance is not just about fees. You've got the benefits of the listed structure like gearing,' she explained, highlighting a key difference between investment companies and oeics, that these can borrow money cheaply to boost returns.'

Brodie-Smith added: 'In the case of SLI, if you look at the closed-end fund compared to the Oeic this is a competive rate. We have seen a number of companies do this [remove performance fees] and I think that's in preperation for the RDR.

'It's hard to generalise, but advisers tend not to like performance fees. Foreign & Colonial and British Assets have all done this, perhaps the beginnings of a trend in terms of this specific change.'

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