Interactive Investor

Investment trust fee cuts continue to gather pace

Under a tiered fee structure, which various high-profile trusts have moved to over the past couple of ye…

14th July 2020 10:53

Kyle Caldwell from interactive investor

Under a tiered fee structure, which various high-profile trusts have moved to over the past couple of years, the annual charge reduces as the trust’s assets grow.

Investment trust boards are continuing to make strides to win back a historically held competitive advantage over open-ended funds – a lower annual management fee.

In the first half of 2020, a total of 18 investment companies cut charges, whether by simply reducing their yearly fee, dropping their performance fee or introducing a tiered fee structure.

Under a tiered fee structure, which various high-profile trusts have moved to over the past couple of years, the annual charge reduces as the trust’s assets grow.

Notable names that have made this change since 2017 include Scottish Mortgage, Lowland, and Templeton Emerging Markets. In the first half of 2020, boards that have been more recent adopters include Aberdeen Asian Income, Edinburgh Investment Trust, and European Opportunities.

Ian Sayers, chief executive of the Association of Investment Companies, notes: “It is encouraging to see investment company boards continuing to negotiate lower costs, particularly during the difficult times of the past few months.”

One of the historical advantages of investment trusts is that on the whole, they have been cheaper than open-ended funds. This, however, is no longer necessarily the case, due to rules introduced in 2013 which banned commission payments for financial advice and resulted in a proliferation of commission-free clean share classes. Some fund managers took the opportunity to reduce their charges, which is why some charges are now lower than those of similar investment trusts.

To move with the times, and with a view to try and retain their historic competitive advantage over open-ended funds, various investment trust boards have responded by cutting charges and passing on economies of scale.

When it comes to open-ended funds, most fund management firms toe the line and quote an ongoing charges figure (which does not include transaction costs) of around 0.8-1%. Some charge slightly less, others a bit more, but in general there is a serious lack of competition on the charges front.

In general, economies of scale are rarely passed on, with the same fee usually levied even if the fund grows from £100 million to £10 billion.

The trend towards tiered fees by investment trusts is a move in the right direction in this respect.

This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.

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