Don’t al­low fees to be­come foes

High charges can act as a drag on your port­fo­lio’s per­for­mance

Shares - - CONTENTS - (JC)


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.


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.


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.


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).

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