A new bill targeting investment trust cost disclosure is to be introduced in the House of Lords today (5 September). The proposed legislation hopes to ensure clearer and consistent disclosure of costs for investors, in a move that many hope will reshape indusrty practises.
As the issue gains momentum, here four spokespeople from around the industry discuss the impact the bill could have.
Darius McDermott, managing director, Chelsea Financial Services
Investment trusts are a cornerstone of our multi-asset VT Chelsea Managed funds, comprising 38% of the portfolio allocation across the funds on average. Their importance within the UK market cannot be overstated, providing investors with unparalleled access to unique asset classes like property, private equity, and infrastructure – all sectors linked to the UK’s long-term economic prosperity.
However, they have recently faced unprecedented challenges, with rising interest rates and persistent inflation dampening investor confidence and widening discounts.
Compounding these difficulties is misguided cost disclosure regulation. By requiring the ongoing expenses of investment companies to be aggregated twice in portfolio costs, we are effectively double counting.
See also: Investment trust cost disclosure bill to be introduced in the House of Lords
This inaccurate disclosure is not only misleading but also inconsistent with standard corporate practices, comparable to demanding companies like BP plc or HSBC Holdings plc disclose internal expenses separately.
We must get cost disclosure right to protect the integrity of this wonderful sector. Doing so will result in better choice and diversification options for investors like us, as well as support alternative assets providing the foundation for economic growth.
Giles Frost, chair, Amber Infrastructure
We strongly support this bill, as reform in the current costs disclosure regime which applies to investment companies is long overdue. The current regulations offer a highly misleading picture to the very investors who are intended to benefit from them.
The London listed investment company sector has a long and proud history of both innovation and for offering ordinary retail investors the ability to invest in listed companies which themselves invest into asset classes that those individual investors could themselves not otherwise easily access.
Moreover, such companies offer daily stockmarket liquidity. This is an obvious advantage over the unit trusts investing in less liquid assets which have from time to time suffered ‘gating restrictions’ that can force investors to wait for their money back.
Regrettably, however, UK regulations carried over from before Brexit require funds like these to report costs on an artificial basis that hampers comparison rather than encourages it. There is no good reason why investment companies should be treated differently from other listed companies in this way.
We want our sector to thrive believing that this is both good for individual investors and good for the health of the UK listed markets. So we strongly support the case for reform.
Richard Davidson, chair, MIGO Opportunities Trust
As a long-standing and significant investor in investment companies, MIGO is deeply concerned about recent developments regarding the disclosure of the ongoing charges figure (OCF) in the sector. If left unaddressed, these changes pose a serious threat to the future of the industry.
Misleading regulations are not only stifling investment options for self-directed investors but also restricting capital flows into sectors crucial for economic growth, such as infrastructure and private capital. This is especially concerning as several investment companies have been unfairly excluded from certain investment platforms.
See also: Could one spreadsheet column solve the cost disclosure crisis for trusts?
While we are encouraged by the upcoming private members bill addressing this issue, we believe the FCA must intervene to ensure that the expenses associated with listed investment companies are accurately reflected in OCF calculations across all retail product/service categories. By doing so, the regulator can help protect the interests of investors and maintain the vitality of this vibrant sector.
Ben Conway, CIO, Hawksmoor Investment Management
Investors must be given the correct information concerning the product costs of their investments. This means telling investors what percentage of their invested capital they will lose regardless of the performance of the underlying investments.
For open-ended funds, this means telling investors what all the costs associated with running that fund are – including, but not limited to, the annual management fee of the investment / fund manager and administration costs.
Regardless of how well the portfolio performs, the investor is going to see a cost. For a listed closed-ended investment company, there are no such costs. This is because any ‘costs’ that are incurred are not ‘product costs’ but ‘expenses’ that impact the net asset value of the company.
The investor in a company buys and sells shares in said company, not a unit of the NAV (in contrast to open-ended funds). The current regulatory and legislative regime does not make this distinction and forces the disclosure of company expenses as if they were product costs.
This is simply wrong and misleading. Investment company expenses are already fully disclosed in reports and accounts per UK listing rules. However, I support additional disclosure of such expenses, expressed as a percentage of NAV, if they appear and are contextualised appropriately.
Funds and portfolios that own investment companies should not be forced to aggregate the company expenses as if they are additional costs that investors pay because of investing in them. This is simply a case of right and wrong.
We must have correct treatment of investment company expenses: they are the ideal vehicle to channel private sector capital into productive areas of the UK economy. The role that investment companies can play at a time of stretched government finances cannot be underplayed.
