Should you buy investment trusts with high charges?
Is it worth putting money into investment trusts with high fees? Historical performance data would suggest higher-cost trusts are worth exploring although you cannot draw any firm conclusions from the data.
Three of the most expensive trusts in the UK All Companies sector, as measured by ongoing charges, delivered some of the best returns on a five-year total return basis. These were Fidelity Special Values (FSV) at 47.9%, Crystal Amber (CRS:AIM) at 55.8% and Manchester & London (MNL) at 98.6%. All three trusts have an ongoing charge in excess of 1%, according to data from the Association of Investment Companies (AIC).
Crystal Amber is an activist investor and its investment trust provides the general public with access to a small number of scenarios where it is pushing for change. For example, the current portfolio includes stakes in oil and gas firm Hurricane Energy (HUR:AIM), currency provider FairFX (FFX:AIM) and van hire group Northgate (NTG).
Activist investing can be a lengthy process, particularly if management oppose any of the proposals for change. As a result, Crystal Amber’s returns can be lumpy.
UK EQUITY INCOME PERFORMANCE
The best returns from the UK Equity Income sector came from trusts with ongoing charges in the middle of the range, again on a five-year total return basis.
The average ongoing charge is 1.02% for the sector although this is skewed by the highest two trusts having significantly greater charges: British & American (BAF) at 4.18% and Investment Company (INV) at 2.67%. These trusts delivered a -12% and 4.2% total return respectively over five years.
The best performers were trusts which charge between 0.67% and 0.99%. The former applies to Finsbury Growth & Income (FGT) which was the top performer with 69.6% total return over five years. Other strong performers included Troy Income & Growth (TIGT) which returned 46.6% and has a 0.9% ongoing charge.
TRUSTS WITH LOWEST CHARGES
The lowest charge in the UK Equity Income sector can be found with City of London (CTY) at 0.41%. It has returned 31.3% over the past five years. Fund manager Job Curtis says being invested in housebuilders has helped the trust’s returns over this period, although they detracted from performance in 2018.
Woodford Patient Capital (WPCT) has the lowest charge for the UK All Companies sector at 0.18%. It doesn’t have a long enough history to produce five-year returns data. The next cheapest is Mercantile (MRC) at 0.47%, which has returned 41.7% over five years.
Mercantile portfolio manager Guy Anderson says the trust’s decision to gain more exposure to smaller firms in 1994 has paid off by driving stronger returns. The trust targets UK companies outside the FTSE 100 which offer considerable growth prospects.
FEES CAN RELATE TO SKILLSET
Fees can vary among investment trusts depending on the size and style of their portfolio. Investment trusts with large assets under management can benefit from economies of scale; others benefit if the trust is part of a portfolio of trusts with the same people working across all the products.
Some trusts justify higher charges if they are providing a specialist skill such as access to private equity investments. Crystal Amber would probably justify its higher ongoing charges because of its hands-on activist investing approach. It proactively helps companies rather than simply buying their shares.
It is unclear why British & American feels it can justify a 4.18% ongoing charge. It invests in other investment trusts and individual companies to achieve a balance of income and growth.