After highlighting the most expensive UK investment trusts, we look at the other end of the spectrum, to find the investment trusts with the lowest charges investing in the UK.
The industry standard for calculating ongoing charges on investment trusts has been set by the Association of Investment Companies (AIC). It includes management charges, directors’ fees and administration costs. It also calculates the fee based on the trust’s net asset value (NAV) with its debt, or gearing, at fair value.
However, performance fees are not included in the ongoing charge which can be confusing as there are a wide range of performance hurdles using different benchmarks to calculate this additional fee.
10 trusts with lowest ongoing charges
|Trust||Lowest Ongoing Charges (%)||Performance fee||With performance fee||Share price total return 1 year (%)||Share price total return 5 years (%)|
|City of London||0.45||Yes||None charged||22||35|
|Henderson Smaller Companies||0.54||Yes||None charged||44||55|
|Dunedin Income Growth||0.65||Yes||None charged||22||21|
|BlackRock Smaller Companies||0.69||Yes||0.97||33||80|
|JPMorgan Elect Managed Income||0.71||No||N/A||19||2|
How we got the figures
We applied the same methodology to find the cheapest trusts in the UK as when looking for the most expensive trusts. We selected all trusts from the AIC's UK Growth, Growth & Income, High Income and Smaller Companies sectors. We took the ongoing charges figures from Morningstar. Its data showed the average ongoing charge on investment trusts in these UK sectors in 2011/2012 was 1.1%. The total returns figures were supplied by Winterfloods and show the performance over one and five years to the end of November.
Cheapest UK trusts – what the analysts say
City of London is the cheapest UK trust, before accounting for performance fees. The trust is managed by Job Curtis at Henderson and has top holdings in blue-chip stocks like British American Tobacco and Royal Dutch Shell. It has also delivered 46 years of increasing dividends and yields 4.4%.
Kieran Drake, research analyst at Winterflood, says: ‘Income is in high demand at the moment and the trust has a fantastic record of growing dividends for consecutive years so I think that’s something which will appeal to investors because you can be fairly sure that with next year’s dividend they’re going to continue that record of growth. It currently trades on a premium which reflects investor sentiment.’
However, the fund does charge a performance fee and hasn’t performed as well as Temple Bar, the second cheapest trust. Temple Bar trust is managed by Alastair Mundy at Investec and invests in underperforming ‘special situations’ companies. The trust has no performance fee, making it the cheapest of all UK trusts in the years that City of London charges a fee. It has also given stronger share price total returns of 23% and 60% on a one and five year basis, ahead of City of London’s total returns of 23% and 60% over the same time periods.
Mid-cap trust, Mercantile, appears in third place with ongoing charges of 0.52% and has performed well in the past year, with total returns of 30%, boosted by the rally in many stocks in the FTSE 250 index.
Charles Cade, head of investment company research at Numis Securities, says: ‘What you tend to find is the funds which are older and have been around for a while have much lower fees. The traditional funds had very low fees when they launched and haven’t increased like some of the newer funds. Also the larger the fund, the lower the ongoing charge because the fixed costs are spread over a broader asset base.’
Neil Woodford’s Edinburgh trust also appears in tenth place with ongoing charges of 0.72%. However, it’s worth noting that although the trust has one of the lowest ongoing charges, when its performance fees are included the total annual cost rises to 1.12%.
10 cheapest trusts with performance fees
|Trust||Lowest with performance fees (%)||Share price TR 1 year (%)||Share price TR 5 years (%)|
|BlackRock Smaller Companies||0.97||33||80|
|Schroder Income Growth||1.05||21||39|
|Perpetual Income & Growth||1.15||22||41|
|Invesco Perpetual UK Smaller Companies||1.2||33||48|
|Dunedin Smaller Companies||1.39||43||72|
|Schroder UK Mid Cap||1.43||32||49|
|Value and Income||1.84||10||23|
Although almost half of all UK investment trusts have performance fees very few claimed them in 2011/2012, as they didn’t generate sufficient growth in that year. Because of this there is actually some overlap beween this table and the one in the previous article showing the highest charging trusts with performance fees.
Lowland, a large and mid-cap equity trust managed by James Henderson appears as the cheapest once performance fees are included, at 0.92%. The trust is also one of the cheapest trusts based solely on ongoing charges of 0.62%,
The trust has top holdings in Carclo and Senior and has given share price total returns of 31% in the past year and 20% over the past five years.
However, one of the trusts which appears as a cheap trust when performance fees are included is Value and Income, with a fee of 1.84% including performance charges. It invests in equity and property and as it’s tenth on the list, this also makes it the fifth most expensive, most likely due to its high ongoing charges of 1.35%.
Despite charging a performance fee the trust has given a low share price total return of 10% in the past year and 23% over the past five years.
Cade explains: ‘Value & Income is very different as it’s an equity income and property portfolio, so we don’t see it as directly comparable to the other UK Income Growth trusts. The charges are higher partly because it’s based on growth assets and has some gearing.
‘Its performance fee is based on a three-year rolling share price so if you have a strong recovery period you can earn a fee. It’s an example of how the structure of performance fees is crucial and you’d like to think companies only earn them if they’re performing very well and outperforming their peers. Value & Income is paid a performance fee although its performance relative to its peers certainly doesn’t stand out.’
Structure of performance fees
Undoubtedly performance fees complicate matters when trying to calculate the overall cost of buying an investment trust. Although fees aren’t the biggest factor for most investors when considering an investment they are something to consider.
Cade adds: ‘I think the fee base is worth looking at. Some people are very comfortable with performance fees as long as it’s properly structured so the manager only gets paid if they really are delivering and not just being lucky or taking more risk to do it.
‘All things being equal you’d rather not have a performance fee because it dilutes your returns but you want the managers to be incentivised and if they’re not getting paid their focus will be elsewhere and that’s the longer-term threat.’