Yet another IT cuts management fee

[forrado]

I was just idly browsing this article on the AIC site concerning Troy Income & Growth (TIGT) at …

https://www.theaic.co.uk/aic/news/citywire-news/trojan-income-cuts-manager-fee-after-first-post-crisis-loss

When midway through the article the following sentences made me sit up and think …

“A total of 43 investment trusts and investment companies cut their annual management charges last year. This was in response to the ongoing pressure from cheap index-tracking funds but also controversial new key information documents which require investment trusts to disclose the impact of their costs and charges on investor returns.
The Association of Investment Companies trade body has complained that its members have been put at a competitive disadvantage by having to introduce KID documents three years before rival open-ended funds.”

When one considers that the AIC currently claim to have 399 close-ended investment companies as members then near 11% of them have felt the need to take such cost-cutting action in the past 12 months. While the rise of low-cost index tackers is playing a part, by far the biggest influence has been the introduction, by the EU, of KID documents since 1 January 2018.

Known officially as ‘The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation’ and commonly referred to as ‘Key Information Documents (KIDs)’. All EU recognised UCITS (Undertakings for Collective Investment in Transferable Securities) – of which investment trusts are one example – are now required to clearly state, together with such other information, charges and associated costs.

The point of the exercise being whereas previously retail investors could, let’s say for example, only partially lift the lid, they can know completely remove that lid when it comes to gauging the impact of charges and costs on performance. That’s why the AIC is so strenuously objecting to KIDs because of the greater than ever transparency the regulation is imposing on the 399 membership. While the AIC has every right to protect and promote the interests of its members, such activities are not always in the best interests of its target audience – the retail investor.

[Alaric]

they can know completely remove that lid when it comes to gauging the impact of charges and costs on performance.

Is that completely correct? I don't think they are required to account for their trading costs for example. That's always been there, but it gets hidden in the performance. A private investor investing in shares directly would always be aware of trading costs.

[TUK020]

The point of the exercise being whereas previously retail investors could, let’s say for example, only partially lift the lid, they can know completely remove that lid when it comes to gauging the impact of charges and costs on performance.

Gauging or Gouging?

[MDW1954]

they can know completely remove that lid when it comes to gauging the impact of charges and costs on performance.

Is that completely correct? I don't think they are required to account for their trading costs for example. That's always been there, but it gets hidden in the performance. A private investor investing in shares directly would always be aware of trading costs.

Yes, it is completely correct, as you can easily see by looking at a KID. (I looked at CTY, for instance.)

You may also like to know that I am the author of an upcoming article on Monevator on this very topic. It should be out in the next few days.

MDW1954

[Dod101]

I have just received an email from Baillie Gifford telling me that they have reduced the management fees on four of their ITs, Edinburgh Worldwide, Pacific Horizons and their two Japan Trusts wef 1 January 2019. I gather they are concerned about the rise in the popularity of tracker funds and I guess that most active fund managers are.

Dod

[Alaric]

Yes, it is completely correct, as you can easily see by looking at a KID. (I looked at CTY, for instance.)

Never mind the KID, what about the accounts? I don't think they show trading costs as an expense. Instead they are buried in investment gains or losses.

[MDW1954]

Yes, it is completely correct, as you can easily see by looking at a KID. (I looked at CTY, for instance.)

Never mind the KID, what about the accounts? I don't think they show trading costs as an expense. Instead they are buried in investment gains or losses.

Yes, but they have to break them out for the KID.

MDW1954

[OhNoNotimAgain]

OEICs have been producing KIIDS for years.
The two important numbers to look at are portfolio turnover ratio and the total cost, in £ cash, of running the fund.

[richfool]

Noting that there are KID's and KIID's, there are a couple of good articles about how they affect IT's and OEICS here:

https://www.moneymarketing.co.uk/trusts ... reporting/

and:

https://www.sharesoc.org/blog/regulatio ... dding-who/

I did notice these comments:

At present investment trusts are mainly affected. Unit trusts and OEICs that are UCITS have another two years to comply.

I posted a comment on the Citywire article which said: “The regulations impacting investment trusts are a typical example of EU laws written by folks who do not understand the UK market environment, and are also generally ignorant of the financial world. The sooner we depart the better. Expensive and incompetent bureaucracy in more ways than one.”

Investment trust sales may come under pressure due to new EU rules, experts have warned.

The potential benefits of gearing on investment trusts risk being overlooked as new cost reporting rules make them look more expensive compared with open-ended funds.

Traditionally, closed-ended funds have looked attractive based on lower costs compared with other structures, as well as their longer-term investment horizon and higher liquidity.

However, charges in the new Key Information Documents under the recently-launched Priips regulation must include the cost of borrowings, which are not included in the traditional ongoing charges methodology. Other funds such as Oeics cannot use gearing so are unaffected.

[Lootman]

The two important numbers to look at are portfolio turnover ratio and the total cost, in £ cash, of running the fund.

I assume there that the "total cost" excludes the costs of trading i.e. commissions, spreads and stamp duty?

If it's an index fund then I'd just look at the tracking error instead, since that reflects all possible costs and expenses.

For an active fund an investor might not mind higher expenses as long as the fund beats its stated benchmark with any kind of consistency.

I take the view that statements of costs (*) may be false, but actual after-costs returns cannot lie.

(*) It can be a grey area how some costs are allocated. Some costs might be allocated to the fund manager or to the funds themselves. I've seen some mischief around that in my time.