Changes in rules governing the disclosure of charges could drive a rally in investment trusts
Rupert Hargreaves Investment columnist
The investment-trust sector has been buffeted by strong headwinds in recent years. These stem from significant changes in the regulatory environment and the asset-management industry. These challenges can be traced back to the current European regulations on investment products for retail investors, the so-called PRIIPs Regulation. It has had unintended consequences for investment trusts. As trusts are virtually unique to the UK and comprise only a small percentage of the global fund-management industry, the rules were developed with little thought given to these vehicles.
PRIIPs force managers to disclose annual management fees and transaction costs for funds. This makes sense with open-ended funds, as the charges and costs are taken out of returns. But with investment trusts, this level of disclosure around costs is misleading because the costs are already incorporated in the company’s valuation and share price. As a result, charges are effectively being double counted. As asset managers are becoming increasingly aggressive when it comes to excluding high-cost investments from portfolios, that’s a problem. Partially thanks to new consumer-duty rules formulated by the Financial Conduct Authority, the city regulator, and partly because they’d rather get better returns for their investors than pay extra fees, asset managers have been avoiding trusts with high fees. Some investment platforms have also been banning trusts, which are perceived to have high fees, from their platforms.
To add insult to injury, as the investment-management industry has grown, both organically and through acquisitions, smaller investment trusts have been excluded from portfolios. Asset managers tend to segregate clients into “risk buckets” (another side effect of regulation) and use a single portfolio template for each risk bucket. That means they will shy away from assets where they can’t be sure they’ll be able to buy enough stock to meet clients’ requirements. Both of these technical factors have acted to drive a wave of trust selling, leading to wider discounts and poor returns.
The good news is that in December, the Treasury said it wa
