ITs squealing about cost disclosure

[GeoffF100]

Investment Trusts are squealing about the prospect of increased cost disclosure, as the FCA extends the PRIIPS regime. "Calls for judicial review into FCA as investment trust sector faces extinction":

https://portfolio-adviser.com/calls-for ... xtinction/

[Alaric]

From the link

Parfect said: “What the FCA has failed to understand is that, despite the best intentions, IFAs are time-strapped people who are not necessarily well-versed in their underlying investments – because that is not their job.

“Their job is to understand the tax and the financial planning aspects for their clients. They rely heavily on software packages, which have a very clean and easy column showing costs, but they can’t show a value figure.

IFAs don't know much about investment. Who would have thought it?

[Dumbo]

Investment Trusts are squealing about the prospect of increased cost disclosure, as the FCA extends the PRIIPS regime. "Calls for judicial review into FCA as investment trust sector faces extinction":

https://portfolio-adviser.com/calls-for ... xtinction/

Thanks for the link GeoffF100.

I've been looking for more info on this subject for quite a few weeks. Reading the article it explains how costs might be increased for IT's. Whether this is fair or unfair I don't know.

Apologies to the AIC if I've missed any information they've put out on this subject but I can't see anything on their website. When you go on to the AIC website, there seems no reference to this subject at all. I would have thought there would be some mention of the subject as it clearly affects their industry.

Best wishes.

[Alaric]

I've been looking for more info on this subject for quite a few weeks. Reading the article it explains how costs might be increased for IT's. Whether this is fair or unfair I don't know.

I'm not sure the costs are increased, it's more about the way they are presented. If costs are calculated as a precentage of net asset value and then expressed as a percent of market value, they will come out higher when the market price stands at a discount. The other problem is an insistence of including costs of borrowing in the expenses figure. Potentially gearing can enhance rather than reduce returns.

Historically IFAs never liked to recommend ITs anyway, an aversion to their lack of commission being partly the cause. If investments are going into areas with a lack of liquidity and lack of instant market pricing, the IT structure works better than the OEIC one.

[Dod101]

Investment Trusts are squealing about the prospect of increased cost disclosure, as the FCA extends the PRIIPS regime. "Calls for judicial review into FCA as investment trust sector faces extinction":

https://portfolio-adviser.com/calls-for ... xtinction/

Thanks for the link GeoffF100.

I've been looking for more info on this subject for quite a few weeks. Reading the article it explains how costs might be increased for IT's. Whether this is fair or unfair I don't know.

Apologies to the AIC if I've missed any information they've put out on this subject but I can't see anything on their website. When you go on to the AIC website, there seems no reference to this subject at all. I would have thought there would be some mention of the subject as it clearly affects their industry.

Best wishes.

Of course costs are not increasing for the IT industry. What seems to be happening is that the way the expenses of running these businesses is being changed so as to include all sorts of costs that are common to all businesses. Somebody needs to go back to the drawing board and take a look at first of all the point in any disclosure of costs.

Dod

[scrumpyjack]

I've been looking for more info on this subject for quite a few weeks. Reading the article it explains how costs might be increased for IT's. Whether this is fair or unfair I don't know.

I'm not sure the costs are increased, it's more about the way they are presented. If costs are calculated as a precentage of net asset value and then expressed as a percent of market value, they will come out higher when the market price stands at a discount. The other problem is an insistence of including costs of borrowing in the expenses figure. Potentially gearing can enhance rather than reduce returns.

Historically IFAs never liked to recommend ITs anyway, an aversion to their lack of commission being partly the cause. If investments are going into areas with a lack of liquidity and lack of instant market pricing, the IT structure works better than the OEIC one.

I can't see what is unfair about reporting costs both as a % of NAV and of Market value. The managers should concentrate of reducing the discount rather than whining about the statistics. It is unfair that they have to report interest on gearing as a cost without being able to include the return on the investments bought with the borrowings.

But I think most investors in ITs are reasonably financially literate and will see through these distortions.

[Dod101]

I'm not sure the costs are increased, it's more about the way they are presented. If costs are calculated as a precentage of net asset value and then expressed as a percent of market value, they will come out higher when the market price stands at a discount. The other problem is an insistence of including costs of borrowing in the expenses figure. Potentially gearing can enhance rather than reduce returns.

Historically IFAs never liked to recommend ITs anyway, an aversion to their lack of commission being partly the cause. If investments are going into areas with a lack of liquidity and lack of instant market pricing, the IT structure works better than the OEIC one.

I can't see what is unfair about reporting costs both as a % of NAV and of Market value. The managers should concentrate of reducing the discount rather than whining about the statistics. It is unfair that they have to report interest on gearing as a cost without being able to include the return on the investments bought with the borrowings.

But I think most investors in ITs are reasonably financially literate and will see through these distortions.

And of course, borrowings at market value and at redemption value. It is all just too complicated and they need to get back to asking themselves what they are trying to show and find one standard measure of costs across all ITs or possibly investment companies.

Dod

[GeoffF100]

t is unfair that they have to report interest on gearing as a cost without being able to include the return on the investments bought with the borrowings.

It is fair. Interest on borrowing is a cost. There may have been extra gains (or losses) as a result of that borrowing, but that is accounted separately as investment return. It is not only investment trusts that use leverage. Some ETFs do too. The same rules apply.

[Dod101]

t is unfair that they have to report interest on gearing as a cost without being able to include the return on the investments bought with the borrowings.

It is fair. Interest on borrowing is a cost. There may have been extra gains (or losses) as a result of that borrowing, but that is accounted separately as investment return. It is not only investment trusts that use leverage. Some ETFs do too. The same rules apply.

But fundamentally why should ITs have to disclose all their costs anyway?

Unilever ever does not have to against say Marks and Spencer and even if they did what would that tell us?

Dod

[Urbandreamer]

It is fair. Interest on borrowing is a cost. There may have been extra gains (or losses) as a result of that borrowing, but that is accounted separately as investment return. It is not only investment trusts that use leverage. Some ETFs do too. The same rules apply.

But fundamentally why should ITs have to disclose all their costs anyway?

Unilever ever does not have to against say Marks and Spencer and even if they did what would that tell us?

Dod

To be fair, companies do report gearing and there is quite a lot more in their financial report. However the end of your sentence should possibly be shouted.

Much of the issue is an attempt by regulators to make it possible to compare apples and oranges.
Arguably like comparing a food and soap producer with a retail chain!

Historically, as I understand it, the original regulations came from Europe.

Ignoring political debate, it might be worth recognizing that one small country in Europe had a couple of hundred years of experience with IT's, while all the other countries were having them introduced to retail investors who had never seen the like before.
Is it any surprise that an attempt was made by European regulators to try and require such to inform investors?

That is of course not the issue, but that regulators who didn't understand the product, insisted that the citrus flavor of apples be graded.

[DrFfybes]

But I think most investors in ITs are reasonably financially literate and will see through these distortions.

I think most(?) investors in ITs look at the past performance, yield. Discount to NV, and area of interest first, before looking at fees.

When comparing similar passive funds/ETFs then I do look at fees, but for ATST or FCIT I really have no idea of their charges, but I do know what they've returned

Paul

[DavidM13]

t is unfair that they have to report interest on gearing as a cost without being able to include the return on the investments bought with the borrowings.

It is fair. Interest on borrowing is a cost. There may have been extra gains (or losses) as a result of that borrowing, but that is accounted separately as investment return. It is not only investment trusts that use leverage. Some ETFs do too. The same rules apply.

Yes, it is a cost but it shouldn’t be lumped in to the same cost figures as the managers yacht fund. It is an investment decision and also gearing is agreed with the directors who act on behalf of shareholders. Take Scottish Mortgage Trust its quality of debt terms are so good it actually adds 26p to their NAV. While I am in agreement that more emphasis should be put on returns than costs, it doesn’t really matter if its “accounted for separately” as that is not how people filter on costs and is not how costs must be disclosed. I believe ETFs leverage using portfolio gearing (derivatives) rather than structural gearing (bank debt) so they do not need to disclose in the same way.

[DavidM13]

But I think most investors in ITs are reasonably financially literate and will see through these distortions.

I think most(?) investors in ITs look at the past performance, yield. Discount to NV, and area of interest first, before looking at fees.

When comparing similar passive funds/ETFs then I do look at fees, but for ATST or FCIT I really have no idea of their charges, but I do know what they've returned

Paul

It is more about the disclosure level in the distribution chain rather than the individual investors. Lemons know what to look for, but the middle layers (IFAs, Wealth Managers etc) need to disclose no matter what.

I personally think its unfair that they have to disclose their fund of fund costs. If Fund A invests in Fund B (and they are from different investment houses) then Fund A should disclose their cost of course but to also be forced to add Fund Bs costs to its own costs disclosure feels wrong to me. Its an investment decision that will be borne out within its returns. If there is no link between Fund A and Fund B then Fund A shouldn’t be penalised by having to disclose the fund costs of Fund B.

[DavidM13]

Thanks for the link GeoffF100.

I've been looking for more info on this subject for quite a few weeks. Reading the article it explains how costs might be increased for IT's. Whether this is fair or unfair I don't know.

Apologies to the AIC if I've missed any information they've put out on this subject but I can't see anything on their website. When you go on to the AIC website, there seems no reference to this subject at all. I would have thought there would be some mention of the subject as it clearly affects their industry.

Best wishes.

Of course costs are not increasing for the IT industry. What seems to be happening is that the way the expenses of running these businesses is being changed so as to include all sorts of costs that are common to all businesses. Somebody needs to go back to the drawing board and take a look at first of all the point in any disclosure of costs.

Dod

Exactly. That is a big issue too. Property funds/renewables need to manage and maintain the buildings so the buildings dont fall down. These are not standard management charges and should be accounted for separately. I am not against any disclosure at all but I think it needs to be granular to allow investors to make sensible comparisons.

Land Securities, British Land, National Grid etc. = 0% "Costs" While ICs doing similar things have what looks like high costs.

[DavidM13]

I can't see what is unfair about reporting costs both as a % of NAV and of Market value. The managers should concentrate of reducing the discount rather than whining about the statistics. It is unfair that they have to report interest on gearing as a cost without being able to include the return on the investments bought with the borrowings.

But I think most investors in ITs are reasonably financially literate and will see through these distortions.

And of course, borrowings at market value and at redemption value. It is all just too complicated and they need to get back to asking themselves what they are trying to show and find one standard measure of costs across all ITs or possibly investment companies.

Dod

I can't see a way around that. It has been reported like that since around 2004. You need a way of comparing two trusts which are identical in every way apart from the terms of their debt. The Fair Values vs Par values allows for this. That is for NAV valuations rather than cost disclosures though in any case.

[Dumbo]

I can't see a way around that. It has been reported like that since around 2004. You need a way of comparing two trusts which are identical in every way apart from the terms of their debt. The Fair Values vs Par values allows for this. That is for NAV valuations rather than cost disclosures though in any case.

Thanks for the info DavidM13.

I still can't find anything much about this subject on the AIC website - https://www.theaic.co.uk/learn-more

Am I looking in the wrong place?

Getting some balanced info on this subject would be good. Do you know of any such source of information?

Best wishes,

Dumbo

[SalvorHardin]

In my years working for Accountants, Solicitors and fee-charging IFAs, I used to run across a lot of people who had bought investments after receiving advice.

Investment Bonds were very popular. No doubt the 5% commission had something to do with it, particularly when the same firm had unit trusts which were identical to the investment bonds' funds (but paid only 3% commission).

Investment Trusts were rare and were generally seen only if a Stockbroker or fee-charging IFA had been involved.

IMHO the KIID rules as applied to investment trusts have been welcomed by much of the investment industry because they discourage people from recommending them.

Law Debenture is a good example of stupid charge calculations. An early version of charges calculation made it look hideously expensive, because it treated the cost of running its fiduciary services business as an investment management fee. Total nonsense; on par with treating the operating costs of every company that a fund owns as an investment management fee.

Law Debenture's actual fund management fee is about 0.3% p.a.

[Charlottesquare]

I've been looking for more info on this subject for quite a few weeks. Reading the article it explains how costs might be increased for IT's. Whether this is fair or unfair I don't know.

I'm not sure the costs are increased, it's more about the way they are presented. If costs are calculated as a precentage of net asset value and then expressed as a percent of market value, they will come out higher when the market price stands at a discount. The other problem is an insistence of including costs of borrowing in the expenses figure. Potentially gearing can enhance rather than reduce returns.

Historically IFAs never liked to recommend ITs anyway, an aversion to their lack of commission being partly the cause. If investments are going into areas with a lack of liquidity and lack of instant market pricing, the IT structure works better than the OEIC one.

Agreed re the last point, I never want investor supply or demand to impact my investment's need to sell some of its holdings (Appreciate gearing could trigger forced sales), ITs can generally ride through market turbulence as they do not buy or sell themselves.

[Charlottesquare]

In my years working for Accountants, Solicitors and fee-charging IFAs, I used to run across a lot of people who had bought investments after receiving advice.

Investment Bonds were very popular. No doubt the 5% commission had something to do with it, particularly when the same firm had unit trusts which were identical to the investment bonds' funds (but paid only 3% commission).

Investment Trusts were rare and were generally seen only if a Stockbroker or fee-charging IFA had been involved.

IMHO the KIID rules as applied to investment trusts have been welcomed by much of the investment industry because they discourage people from recommending them.

Law Debenture is a good example of stupid charge calculations. An early version of charges calculation made it look hideously expensive, because it treated the cost of running its fiduciary services business as an investment management fee. Total nonsense; on par with treating the operating costs of every company that a fund owns as an investment management fee.

Law Debenture's actual fund management fee is about 0.3% p.a.

Catch with fee advice is you need a critical mass of funds to make paying for it worthwhile.

My father left a small amount of his estate into a life interest trust in his will, £60,000, frankly too small an amount for an IIP trust, however we were stuck with managing it. Family solicitor had a word with brokers re selecting a few ITs, they wanted £2,000, so we did not bother, I selected seven, we stuffed the money in and that was that. After paying out the income (about £2700 pa rising to a bit over £3,500) investment have gone to £100,000 over 10 years (was higher as we were well ahead on SMT, but has fallen back) so not terrible. Of course no idea if that £2,000 would have been vfm, but 1/30th of fund to pick 7 ITs would have been a travesty.

[DavidM13]

I can't see a way around that. It has been reported like that since around 2004. You need a way of comparing two trusts which are identical in every way apart from the terms of their debt. The Fair Values vs Par values allows for this. That is for NAV valuations rather than cost disclosures though in any case.

Thanks for the info DavidM13.

I still can't find anything much about this subject on the AIC website - https://www.theaic.co.uk/learn-more

Am I looking in the wrong place?

Getting some balanced info on this subject would be good. Do you know of any such source of information?

Best wishes,

Dumbo

Hi There,
We don't really carry things like that on the `retail investor` website I am afraid. The AIC is doing a lot of work with the various regulators and stakeholders behind the scenes as you can imagine.

You can read a bit more about the situation according to these guys in various articles on their website.

https://www.hawksmoorim.co.uk/research/ ... ble-count/

https://www.hawksmoorim.co.uk/research/ ... -together/

https://www.hawksmoorim.co.uk/research/ ... -campaign/