According to research from Numis Securities, this is still true for old UK trusts and those in the Global Growth sector as they tend to levy charges of 0.5 per cent or less.
However, Numis says this age-old argument for investing in trusts over open-ended funds is losing ground.
“Most funds launched in recent years have expense ratios of over 1 per cent, and many charge performance fees as well,” Numis said.
“To some degree, the higher fees can be justified by the sector’s focus on specialist asset classes such as infrastructure or private equity that require greater resources.”
“However, investors are becoming increasingly fee-sensitive when making investment decisions. One of the reasons for this is the greater transparency on fund charges as a result of the Retail Distribution Review (RDR), with the introduction of unbundled ‘clean’ share classes by open-ended funds.”
After the new regulation came into force at the start of 2013, headline fees for open-ended funds trended down toward the 0.75 per cent mark, rather than the usual 1.5 per cent they were prior to the rules.
“It is widely expected that growing competition could push management fees lower, with the introduction of ‘super low cost share classes’ by some platforms. In this environment, the traditional cost advantages of [investment trusts] are being rapidly eroded.”
According to Numis, the most expensive investment trusts sit in the IT Japanese Smaller Companies sector, with charges of more than 1.5 per cent.
The sectors with the lowest charges are Global Growth and US Equity, with charges of around 0.75 per cent.
However, in the case of the Global Growth trusts, this discounts any performance fee.
According to Simon Crinage, who heads up JP Morgan’s investment trust business, investment trust boards are making an effort to keep their competitive edge on charges, particularly when it comes to performance fees.
“In general, there has been a cost advantage over open-ended funds in the past,” he said.
“We’re seeing a number of boards reviewing their performance fee and either removing the performance fee or reducing the base fee or both.”
However, Crinage argues this downward pressure on fees is not always a good thing. He points out that a number of investment trust boards had moved to reduce their performance fee, but raised their base fee – a move that could result in higher charges for the end investor.
Crinage’s concern is something Numis flags up in its research as well.
“Not all fee changes may be as altruistic as they appear… managers have often been able to negotiate an increase in the base fee when a performance incentive is removed,” Numis said.
Trusts like Aberdeen Japan and Standard Life UK Smaller Companies saw their base fees increase after their performance fees were cut.
However, Numis says a manager’s ability to up the base fee when a performance fee is removed is waning because of the increased competition from open-ended funds.
Still, Numis agrees there is a trend to cut performance fees from investment trusts.
“There is a growing consensus that simplicity is an advantage if funds are to attract interest from retail investors and IFAs,” the firm said.
“This has led management groups to re-evaluate the benefits of performance fees.”
“Over the past decade, investment companies have increasingly introduced performance fees. This provided the managers with significant potential upside, typically in return for a modest reduction in the base fee. Furthermore, the performance fees are not usually included when calculating ongoing charges.”
“However, some investors are now vocal in their opposition to performance fees. Moreover, the appeal of performance fees to management groups has declined as the multiples applied to such unpredictable revenues are far lower than on regular fee income.”
So far this year, 10 investment trusts have removed their performance fee.
In the case of the Edinburgh IT, which is now run by FE Alpha Manager Mark Barnett after star UK equity manager Neil Woodford left the trust earlier this year, the board removed the performance fee and reduced the trust’s OCF to 0.55 per cent, down from 0.6 per cent.
Twelve trusts removed their performance fees in 2013 and two in 2012.
Source: Numis Securities
But performance fees are still rife across the investment trust industry, with more than half the companies within the entire investment trust universe having a performance fee in place.
Fewer than 100 out of a total of roughly 2,500 open-ended funds have a performance fee, according to the IMA.
However, additional costs for investment trusts can also fly under the radar.
“One area of the charging structure [of investment trusts] that is rarely focused on is the dealing cost of trading,” Numis said.
Last month, Numis’ Charles Cade said due to these trading costs, the argument that trusts are the low-cost route isn’t always correct.
There is clearly pressure in the investment trust industry to make changes to the charging structure, but investors should be cautious about just looking at just the headline numbers and understand the components of the trust’s charging structure.
