Some good news for the investment trust sector arrived earlier this week in the form of a final decision from the Financial Conduct Authority (FCA) on the thorny issue of cost disclosures.
The industry has long been campaigning to change EU regulations which, it argued, penalised investment trusts. Under those rules, funds had to disclose the management costs of any trusts in which they invested as part of their own charges. This, campaigners said, put off wealth managers and other professional fundholders from holding trusts, because doing so made their own products look more expensive.
The FCA’s new set of regulations for retail investment products, which will replace the previous EU rules, changes this. Funds that hold investment trusts in their portfolios will no longer have to include the trusts’ charges within their own ongoing charges figure (OCF); instead, they will be allowed to disclose those costs separately.
This is, broadly, what the industry wanted. It does fall short of its boldest request – that investment trusts should be fully exempt from these regulations because as listed companies they are already regulated by the Companies Act. The FCA rebuffed this idea, noting that investment trusts are not quite like a company such as Tesco – they are still investment vehicles and need to be regulated as such. It is hard to disagree.
Read more from Investors’ Chronicle
But there’s more good news. Gearing and real assets maintenance costs won’t have to be included in a trust’s OCF. This makes it more straightforward for investors to compare a trust’s costs with those of an open-ended fund. Logically, it makes sense because debt costs are not the same thing as management costs, and the effects of gearing are already included in the performance figures.
Richard Stone, chief executive of the Association of Investment Companies (AIC), hailed the FCA’s decision as a “victory for common sense”.
“This removes a cloud that has been hanging over the industry, and returns the market to a pre-2021 ongoing charges figure that everyone used and understood,” he says. “It’s particularly helpful for fund-of-funds managers, whose products were made to look artificially expensive.”
The new regulations will fully apply from 8 June 2027, but firms are able to implement them from April next year if they so wish.
Now, the big question is how much this will actually help the sector. Campaigners have often argued that cost disclosure rules are a key contributing factor to the wide discounts to net asset value that have plagued trusts since 2022.
Discounts have narrowed somewhat over the past two years but remain wide – investment trusts excluding 3i Group (III) were trading at an average discount of 12.9 per cent as at 5 December. In theory, if cost disclosures were a significant factor at play, we should see this gap narrow. That is especially the case for trusts investing in alternative assets, such as infrastructure and private equity, which look particularly expensive under the current rules.
We shall see whether a miraculous recovery materialises, but one has to wonder whether other factors will play a more important role. For example, the renewable infrastructure sector is struggling with a long list of issues, including low power prices, competition from other fixed-income assets and shifting government policy.
As Stifel analysts put it, “these long-fought-for changes are helpful in removing an impediment for some investors to participate in the sector”, but “it is one factor in a whole range of structural and performance issues” that investors have to consider.
As this suggests, it might take more than the FCA’s helping hand to restore demand and close discounts across the sector.