Don’t allow fees to become foes
High charges can act as a drag on your portfolio’s performance
When weighing up investment trusts to add to your portfolio, cost is a key consideration. The greater the charges associated with a fund, the better your investments must perform to deliver you a return.
One of the biggest costs are the fees investment trusts pay to fund managers for managing the portfolio; investment trusts may also pay a performance fee if the manager outperforms certain targets.
Fees charged by activelymanaged funds are frequently under the spotlight; some are accused of overcharging investors despite delivering poor returns. Investment trusts historically enjoyed a fee advantage over unit trusts, although this has narrowed since 2013 when regulation compelled unit trusts to issue cheaper ‘clean’ share classes.
OPPORTUNITY COSTS Helpfully, details of investment trust management fees, and any performance fees, can be found on the website of the Association of Investment Companies (AIC).
The AIC shows ‘ongoing charges’ for all its members, a measure of the regular running costs of an investment trust expressed as a percentage, as well as a separate figure for ‘ongoing charges plus performance fees’.
Annabel Brodie-Smith, the AIC’s communications director, notes investment trust costs are often lower due to their structure.
‘Since 2013 over a third of investment companies have reduced their charges to benefit shareholders by cutting management fees, eliminating performance fees or introducing tiered fees. This demonstrates the value of the independent board which represents shareholders’ interests,’ she says.
PERFORMANCE FEE ABOLITIONS
Year-to-date, several trusts have lowered their cost structure by abolishing performance fees. With effect from 1 January,
F&C Commercial Property Trust (FCPT) removed its performance fee and changed its base management fee to 0.55% per year of the group’s gross assets; it will be reduced to 0.525% on assets between £1.5bn and £2bn and 0.5% on assets more than £2bn.
The trust aims to deliver an attractive level of income together with scope for capital and income growth through a diversified UK commercial property portfolio.
F&C Commercial Property’s net asset value (NAV) total return for the six months to June 2017 was 5.1%, outperforming its benchmark; the MSCI IPD All Quarterly and Monthly Valued Funds Index return of 4.6%. This strong performance partially explains why the shares currently trade at an 8.3% premium to net asset value (NAV).
Perpetual Income & Growth Investment Trust (PLI) has removed its performance fee too. From 1 April, the annual management fee was changed to an annual rate of 0.6% on the first £900m of the trust’s assets and at a rate of 0.4% thereafter.
Previously, fees were based on 0.6% per year up to £500m and 0.4% thereafter, with a performance fee of 10% of any outperformance over the FTSE All-Share capped at 0.5% of net assets.
Boiling all this down, investors can access the stock picking acumen and strong performance of long-serving manager Mark Barnett more cheaply, while an 8.6% share price discount to NAV implies a buying opportunity.
Also in investors’ good books is Aberdeen Frontier Markets (AFMC). As an Aberdeen Standard Investments spokesperson explains, the management fee was cut to 1% of NAV which has helped the shares trade closer to asset value.
WINDS OF CHANGE
Others trusts to have abolished performance fees include BlackRock Latin American (BRLA). Prior to 1 January 2017, the annual management fee was
0.85% of net assets and a performance fee was payable. BlackRock is now paid an annual management fee of 0.8% of net assets and the performance fee has been removed. Janus Henderson-managed Henderson Diversified Income Trust (HDIV) has abolished its performance fee (from 1 November), although the base
fee will rise from 0.6% to 0.65% of net assets. Change has also occurred at BlackRock Throgmorton Trust
(THRG), focused on firms with robust business models, strong cash flows and favourable industry characteristics led by management teams capable of ‘self-help’. The base management fee has been halved to 0.35% per year, with the performance fee proportion increased from 10% to 15% of NAV total return outperformance of the benchmark (measured on a two-year rolling basis), while the performance fee cap has been reduced from 1% of ‘performance fee market value’ to 0.9%.
The hope is the new fee structure will improve performance and boost demand for the shares, which trade at a steep 15.8% discount to NAV.
HUNTING HIGH & LOW
As the tables reveal, those trusts with the lowest AIC ongoing charges plus performance include Woodford Patient Capital Trust (WPCT) on 0.18%, cheap given the acumen of Neil Woodford who continues to scout for disruptive high potential tech businesses.
Others with low costs include Independent Investment Trust (IIT) at 0.34%, Job Curtis-steered dividend hero City of London (CTY), Scottish Mortgage (SMT)
and Mercantile (MRC), which has reduced its management fee from 0.5% of the company’s market cap to 0.475%, a fee set to reduce further to 0.45% from 1 February 2018.
Those with the highest charges tend to be within the AIC’s property sectors; investing in alternative assets like real estate requires expert knowledge and research. So the ongoing charge reflects this situation.
They include strongly performing German residential real estate specialist Phoenix Spree Deutschland (PSDL) followed by the likes of Regional REIT (RGL) and VPC Specialty Lending Investments (VSL).