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Winterflood: The RDR squeeze on investment trust fees

Analyst Winterflood Investment Trusts says investment trust fees will come under pressure as a result of the RDR.

In its latest note, the firm says although trusts appear to have a lower fee base, more will have to look at simplifying their fee structures over the forthcoming year as many open-ended funds look to lower their annual management charge.

It says: “Although trusts are often differentiated by their gearing, we believe it is difficult to justify management fees materially out of kilter with comparable open ended institutional share classes not to mention the retail share class. In our opinion, investment trust fees are likely to come under pressure as a result of RDR.”

Investment trusts have been widely tipped to take a greater market share post-RDR.

Winterflood says the introduction of RDR share classes for Oeics with fees between 65 and 75 basis points as well as the lowering of fees in general by some management groups on retail share classes has resulted in some open ended funds now being cheaper than the comparable investment trusts.

Wins says it conducted research on 90 investment trusts with comparable open-ended funds. It found that 62 per cent of investment trusts have lower-base management fees than their open-ended equivalents. It says only 23 per cent of Oeics charged lower fees than their open-ended counterparts, while 15 per cent charged the same fees.

However, the group says comparison of the net expense ratio, which does not include performance fees, found that only 56 per cent of investment trusts charged lower fees in comparison to the Oeic version, while 40 per cent of Oeics had lower fee than their similar closed-ended offering.

Wins says many investment trust have started to tackle the problems by looking to simplify fee structures. As an example, the group highlighted Standard Life UK Smaller Companies trust which has raised its annual management charge from 0.65 to 0.85 per cent in anticipation of RDR. However, this has come in tandem with the abolition of performance fees.

Wins says: “The removal of a performance fee and reversion to a higher basic management fee is presented as a means of simplifying charges for shareholders in the spirit of the FSA’s aims of greater fee clarity.”


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