Investment trusts with the lowest charges
Low-cost tracker funds including exchange-traded funds have been grabbing ever more market share as investors demand value for money, but there are now an increasing number of active funds, especially investment trusts, competing on price.
When talking about fund pricing, the ongoing charges figure (OCF) is a useful way to compare costs. It includes the annual management charge, administration and custody fees but excludes trading costs and performance fees.
There are currently 17 investment trusts with OCFs of 0.5% or less. Some are large and well-established funds such as Scottish Mortgage (SMT), City of London (CTY) and Monks (MNKS), while others are smaller and managed by less well-known groups.
REGULATORY PRESSURE ON FEES
There has been downward pressure on charges across the fund management world as regulation has encouraged providers to look more closely at the value they give to investors.
In the first half of this year, 18 investment companies changed their fees to benefit shareholders, according to the Association of Investment Companies (AIC). When a trust amends its charges, actions can include lowering management fees, scrapping performance fees, and introducing tiered fee structures linked to size.
One of the trusts with an OCF below 0.5% is Scottish Mortgage, one of the largest and best known in the marketplace at £14 billion in size. It used to have a flat 0.3% management charge, but in April 2017 it introduced a tiered fee of 0.3% on the first £4 billion of assets and 0.25% on the rest.
Another example is the £1.2 billion JPMorgan American (JAM) investment trust, which removed its performance fee last year and waived its management fee for nine months (until 29 February 2020) before bringing in a tiered fee of 0.35% on the first £500 million of net assets, 0.3% on the next £500 million and 0.25% above £1 billion.
The board pointed to the need to offer simple and value-for-money fees, noting that performance fees are often seen as an unnecessary complication by potential investors.
At the other end of the spectrum, the most expensive investment trusts in the marketplace in terms of charges include specialist vehicles such as CATCo Reinsurance Opportunities (CAT) and Life Settlement Assets (LSAA), and they tend to be smaller in size.
ECONOMIES OF SCALE
Despite a few outliers, the trajectory on fees is very much downwards. Over the past two years, 19% of investment trusts have reduced fees, amounting to 78 fee changes which have lowered costs for investors.
‘This demonstrates that investment companies are continuing to cut fees, following the trend of recent years,’ says the AIC’s communications director Annabel Brodie-Smith. ‘Independent boards are a major advantage of investment companies and it’s good to see them continuing to work for shareholders’ benefit by bringing charges down.’
So how is it that some trusts are able to offer such competitive fees? They can do this because the larger trusts get, the cheaper they are to run, explains Brodie-Smith. ‘One of the benefits of the investment trust structure is an independent board of directors and, as the company grows, it’s up to the board to make sure economies of scale are passed on to shareholders.
‘Directors have been very proactive in terms of ensuring their fees are very competitive, many of them have reduced their fees not once but a number of times.’
STRAIGHTFORWARD VS COMPLEX ASSETS
Low fees are also possible when a trust invests in straightforward assets such as equities, rather than something more complex like property.
Kunal Sawhney, CEO of equities research house Kalkine, explains that real estate or private equity trusts, for example, will be more expensive to reflect the extra work that goes into each investment they make.
‘Such specific trusts have to carry out comprehensive research on unlisted companies, complex deals negotiation and more attention in managing those businesses. The real estate sector also tends to have a higher cost as developing, managing, refurbishing of properties can be a costly affair. No monthly rental for some odd periods, legal costs and stamp duty charges will add to the cost burden.’
He suggests that investors do their homework before buying trusts like these, making sure past performance justifies higher fees, and that you’re not taking on too much risk in illiquid and cyclical assets. ‘It is mainly considered a high risk, high return investment strategy for which investors need to pay higher charges to have exposure to such complex assets,’ he adds.
PERFORMANCE FEES: A DYING BREED?
Some investment trusts have a low OCF but still charge a performance fee, although these are in decline on investment trusts investing in mainstream assets.
Across the closed-ended marketplace, 89 investment trusts still have a performance fee in place. Typically, these are 10% to 20% of any outperformance above their benchmark index. If the fund doesn’t meet its set performance target, investors don’t pay the performance fee.
‘Generally, if you look at the sorts of assets they are invested in, they are things like infrastructure, technology, private equity and hedge funds. They are more specialist assets that will require more active management, and there is clearly competition for really good specialist mangers,’ says Brodie-Smith.
The AIC’s view is that performance fees are not in themselves a bad thing as they can align the manager’s interests with those of shareholders. However, these fees should be carefully set to ensure they don’t encourage managers to take excessive risks.