Ian Cowie: investment trusts are cutting fees, but the devil is in the detail

Most things cost more than they did a decade ago. The Bank of England reckons you would need £13.29 today to buy what £10 bought in 2013. But investment trusts are a surprising exception to the insidious effects of price inflation because most of them are charging lower fees today than they did a decade ago.

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New research for readers of interactive investor shows that no fewer than 175 investment trusts have reduced the yearly costs paid by shareholders since 2013. As there are 327 conventional investment trusts, excluding Venture Capital Trusts (VCTs), that have been trading on the London Stock Exchange over this period, that means nearly 54% have lowered their fees during the past decade, one way or another.

However, this being financial services, the devil is often in the detail and some reductions are more straightforward than others. Put another way, these cuts are less likely to entail “tears of joy” than “tiers of quiet satisfaction about lower charges for larger funds”.

In plain English, 123 investment trusts simply reduced their annual fees, while 66 introduced different tiers or bands of charges, depending on each trust’s stock market capitalisation or net asset value (NAV), with rates falling as the sums invested increased.

Meanwhile, another 26 investment trusts removed performance fees, which effectively tip or pay bonuses to fund managers for doing well at work where they are already generously remunerated.

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Never mind the generalities, what about some specific examples? 

Scottish Mortgage (LSE:SMT) Trust used to have an annual fee of 0.32% of NAV, which it reduced to 0.30% in 2014. As SMT trades at a 19% discount to its NAV and the latter is currently £13.3 billion, this basis for assessing fees favoured the fund managers. Then, in 2017, it introduced a tiered fee structure, charging 0.30% on the first £4 billion of assets and 0.25% on assets above £4 billion. So these changes have resulted in shareholders paying lower rates of fees.

However, any gratitude they might feel may be diminished by SMT’s dismal recent investment performance, shrinking its fund by a total return of minus 14% over the last year, which puts this former high-flyer at the bottom of the Association of Investment Companies (AIC) ‘Global’ sector over that period.

Perhaps more importantly, SMT delivered positive total returns of 26% and 320% over the last five and 10-year periods, according to independent statisticians Morningstar, with the latter return placing SMT at the top of its sector over that decade.

F&C Investment Trust (LSE:FCIT) had a base fee of 0.365% of its £4.29 billion stock market capitalisation. As FCIT currently trades at an 11% discount to its NAV of £5.4 billion, calculating fees on the lower stock market cap favours shareholders.

In 2019, a tiered fee structure was introduced with 0.35% charged on the first £3 billion of market cap, then 0.30% up to £4 billion, then 0.25% above £4 billion. In 2022, the first tier was reduced from 0.35% to 0.325%. At the beginning of this year, the tiers were restructured so there is now a fee of 0.30% on the first £4 billion of market cap, and 0.25% above that. FCIT’s total returns over the last year, five years and decade are 1.7%, 29% and 187% respectively.

Finsbury Growth & Income (LSE:FGT) Trust had a base fee of 0.45% of its market cap, which is currently £1.8 billion. Once again, the market valuation basis for calculating fees marginally favours shareholders because this trust is priced below its NAV. Fees were reduced in 2016 to a fee of 0.45% on the first £1 billion of market cap and 0.405% thereafter. In 2019, a further tier was introduced so that the fee falls to 0.36% if the market cap exceeds £2 billion. FGT’s total returns over the usual three periods are 6.9%, 14% and 121% respectively.

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If all those percentages make your eyes glaze over, then remember that the more of your money that sticks to the fund managers’ shovels, the less will be left to work for your benefit.

Let’s move on to a couple of investment trusts which are less well-known than SMT, FCIT or FGT, but which implemented more straightforward base fee cuts.

The first is Henderson International Income Ord (LSE:HINT). With effect from September last year, its base fee was reduced from 0.75% to 0.575% per annum. That’s a handy cost reduction for shareholders but, unfortunately, HINT’s performance was relatively tepid with total returns of minus 0.5%, 19% and 109% over the usual three periods.

Second, in 2021 JPMorgan Global Emerging Markets Income (LSE:JEMI)reduced its base fee from 0.9% to 0.75%. Its total returns were 6.7%, 28% and 65%.

Nick Britton, head of intermediary communications at the AIC, told me: “Over the past 10 years, the independent boards of investment companies have been working hard to negotiate better fees for shareholders.

“We typically see dozens of fee changes every year, which take the form of base fee reductions, introducing or lowering tiered fees, or getting rid of performance fees. It’s one of the benefits of investment companies that shareholders have boards fighting their corner.”

That is not the case at unit trusts or exchange-traded funds where, despite regulatory exhortations to treat customers fairly, there is no formal representation of investors’ interests and the financial objectives of the fund managers tend to come first, second and last. No wonder the Square Mile is sometimes said to be full of plate-glass palaces paid for by investors who couldn’t be bothered to read the small print.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is not a shareholder in any of the companies named above but did buy some shares in F&C Investment Trust (FCIT) for his grandson, Charlie, earlier this year.