One of the advantages that investment trusts have historically enjoyed over their open-ended peers is lower fees, writes Simon Elliott, head of investment trust research at Winterflood Securities.
Before the Retail Distribution Review (RDR) abolished the practice in 2012, most open-ended funds paid trail commission to intermediaries.
This heavier fee load was arguably part of the reason investment trusts have tended to outperform open-ended funds over the long term.
However, since RDR there has been a significant repricing of investment management fees for actively managed funds. This segment of the industry has come under growing pressure from passive funds, with beta proving increasingly inexpensive.
The Financial Conduct Authority (FCA's) Asset Management Market Study has put fees into the spotlight once again and it seems likely the downward direction of travel is set to continue.
This partially explains the disappointing share price performances of listed fund management companies in recent years.
One of the advantages of the investment trust structure is an independent non-executive board, which is there to safeguard shareholders' interests.
These boards have been very active in the repricing of investment management fees for investment trusts since the advent of RDR.
This has resulted in many removing performance fees, while tiered fee structures have become increasingly common, allowing shareholders to benefit from the economies of scale that greater size provides.
According to Morningstar, the average ongoing charges ratio (OCR) for an investment trust invested predominantly in equities is now 1.2% excluding performance fees (on a simple average basis) or 1.4% including performance fees.
It is difficult to argue that lower management fees are not necessarily good for shareholders, but I believe there is a case to be made.
In my opinion, boards must be aware that in constantly driving down fees, they risk reducing the attractiveness of investment trust mandates to fund management groups; last year saw Invesco initially resign as the manager of Invesco Enhanced Income following a badly-handled fee negotiation.
While boards have a duty to ensure fees remain competitive, there has to be a balance and I suspect most investors would rather their chosen fund manager was well-incentivised for the trust to perform well.
This brings us back to performance fees. At one stage, half of the investment trust universe had a performance fee and it was one of the attractions of running them for the fund managers.
Investment trusts were notoriously difficult to grow, due to ingrained discounts, but fund managers were rewarded for performing.
Since RDR, a myth has prevailed that performance fees reduce the attractiveness of investment trusts and prevent retail investors and IFAs from investing. I believe this was, and still is, wrong.
Indeed, I believe retail investors would be perfectly prepared for fund managers to be rewarded for performance rather than relying on assets simply growing.
Interestingly, Fidelity introduced a variable fee last year, which effectively brought a performance fee element to its open-ended fund range and some of its investment trusts.
In many respects it suits larger investment houses to drive down fees, which, in theory, should make it more difficult for smaller, less-established boutiques to offer competitive services.
If the larger houses had the monopoly on stronger performance records as a result of their considerable resources, this might not necessarily be a bad thing.
However, as we all know, in this industry size is no guarantee of performance as evidenced by Lindsell Train's record over the years. Indeed, an argument can be made that the institutionalisation of fund management can lead to increasingly mediocre returns as a result of the fixation on indices, tracking error and risk controls.
This comes down to the role that a non-executive board can play in ensuring the success of an investment company in meeting the needs of its shareholders.
To challenge but support is a delicate balance and one that has become even more important with the increasing ownership by retail investors.
There is of course a danger that some boards feel the need to be active for active's sake, when the reality is that to do nothing is not necessarily a bad option.
It is easy to make changes that run contrary to the reasons why shareholders are invested in the first place.
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