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The underperforming trusts still charging more than their rivals

17 October 2014

Many investment trusts have lowered their charges of late, but some still lag behind the trend despite their relative underperformance.

By Daniel Lanyon,

Reporter, FE Trustnet

Price is one of the key considerations for holders of investment trusts, many of whom believe that the vehicles’ relatively lower fees will help bring about greater returns over the longer term.

Some investment trusts have responded to the shake-up in fee-charging structures under the retail distribution review by applying to their boards to strip back costs further and lower their total annual charge of ongoing charges plus performance fees.

One such example is Baillie Gifford whose star manager James Anderson – who heads up the £3bn Scottish Mortgage trust – told FE Trustnet earlier in the year that putting downward pressure on fees was an ongoing process for his trust.

“I believe in keeping costs low and believe it really profoundly because it is the single greatest advantage we have. I very much hope to keep persuading the board to go further down that direction over the years to come. It really, really matters,” he said.

Many of the highest priced investment trusts specialise in investing very niche areas of the market and are generally smaller funds from boutique fund houses, according to Charles Tan, analyst at Cantor Fitzgerald.

“If you look at the listed hedge funds or private equity, for example, you are buying something that is quite unique that you can’t buy elsewhere,” Tan said.

“Also they are really small. Bigger is better because there are economies of scale. There is a physical limit they can lower their fees without going out of business.”

However, there are several mainstream trusts from the larger investment groups that have underperformed their sector average, benchmark or both over the medium term but are still charging some of the highest fees in their respective sectors.


UK Equity Income

Two trusts in this sector stand out as having high fees relative to their rivals coupled with underperformance over five years: the £21m British & American and the £322m JP Morgan Claverhouse trusts.

The trusts have returned a respective 34.47 per cent and 62.64 per cent over five years while the average fund in the sector made 70.32 per cent and the FTSE All Share gained 47.03 per cent.

Performance of trusts, sector and index over 5yrs


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Source: FE Analytics

British & American has ongoing charges of 3.47 per cent and no performance fee while JP Morgan Claverhouse has an ongoing charges and a performance fee, charging 2.05 per cent last year.

In comparison, the average fund in the sector has an ongoing charge of 0.73 per cent, which rises to 0.97 per cent when a performance fee is applied.


UK All Companies

Here another two trusts stand out as having more expensive fees than the average trust in the sector: the £21.5m Aurora and the £110m Crystal Amber trusts.

It should be noted that the latter specialises in deep recovery stories and takes a more activist position than other trusts, trying to encourage boards to take action.

Both trusts have returned significantly less than the FTSE All Share and IT All Companies sector average over the past five years.


Crystal Amber has made 20.5 per cent while Aurora is up just 6.34 per cent.

By comparison, the average trust in the sector rose 59.77 per cent and the FTSE All Share has gained 47.03 per cent over the same period.

Performance of trusts, sector and index over 5yrs

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Source: FE Analytics

Aurora has an OCF of 2.2 per cent and no performance fee while Crystal Amber has a performance fee on top of its OCF, charging a total of 3.87 per cent over the past year.

The average fund in the sector charges 0.77 per cent, which rises to 0.89 per cent when performance fees are applied.


Global

Both global funds and trusts have become notorious, as an FE Trustnet study showed, for the low percentage of active portfolios that beat the index over the longer term.

The percentage of funds in the IT Global sector that have beaten the MSCI World index over the past five years is approximately 50 per cent.

The £63.8m Cayenne and £253m JP Morgan Overseas trusts levy some of the highest charges in the sector but have underperformed both the peer group and benchmark over five years.

The average fund in the sector has returned 50.30 per cent while the MSCI AC World is up 50.6 per cent.

The two funds have made 28.81 per cent and 48.68 per cent respectively.

Performance of trusts, sector and index over 5yrs

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Source: FE Analytics

Cayenne has an OCF of 2.04 per cent and no performance fees compared to a sector average of 0.78 per cent.

JP Morgan Overseas has an OCF plus performance fees of 1.39 per cent, compared to a sector average of 0.82 per cent including performance fees.



Global Emerging Markets

The £73.7m Ashmore Global Opportunities trust and the £773m Genesis Emerging Markets trust both have significantly higher charges than the average member of their sector.

Both have underperformed their peers, with Ashmore Global Opps losing money.

It is down almost 40 per cent over five years while the average trust has returned 27.55 per cent and MSCI Emerging Markets index has gained 15.71 per cent.

Genesis Emerging Markets has returned 25.32 per cent, beating the index but still just behind the average return.

However, they both have charges more expensive than the average trust.

Performance of trusts, sector and index over 5yrs

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Source: FE Analytics

Ashmore Global Opportunities trust charged 2.83 per cent last year including a performance fee while Genesis Emerging Markets trust has a 1.67 per cent OCF but has no performance fee.

The average emerging market trust has an OCF of 0.78 per cent, with average charges rising to 0.82 per cent after a performance fee.

Over the coming weeks, FE Trustnet will be contacting some of the more expensive investment trusts to find out their plans in an industry that is moving towards lower fees.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.