Investment Trusts Cut Fees Amid Worst Ever ISA Season

NEWS YOU CAN USE: What has been going on in the City? Funds have been cutting fees, investors have failed to top up their ISAs and the UK Equity Income sector is getting smaller

Emma Simon 28 April, 2016 | 9:53AM
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April marks the start of the new tax year, and the chance for a clean slate. Many in the investment industry will be keen to turn this page, and draw a line under what has proved to be a disastrous ISA season.

Figures published this month confirm what many feared: volatile markets, Brexit uncertainty and fears of a pension tax raid have caused many to shun traditional ISA investments this year.

When markets prove difficult investors focus often turns to investment costs, so perhaps it is not surprising that fund management fees were also in the spotlight this month.

Neil Woodford, one of the most respected managers in the UK - started the ball rolling with news that he would stop charging investors research fees. This was followed by news from two investment trusts Lindsell Train (LTI) and Baring Emerging Europe (BEE) about fee changes.

Below there is more information on these, and other investment stories that made headlines this month.

Slump in ISA Sales

Figures published by the Investment Association this month show net ISA sales for March and April were just £237 million, the weakest ISA season on record, since the trade body started collating this data. This is less than half the £563 million recorded for last year’s ISA season.

However, the last minute dash to make the most of this tax-free allowance did push ISA sales into positive territory overall, after outflows in the first two months of this year.

Nervous investors appear spooked by volatile markets: ISA investment into equity funds suffered a net outflow of £459 million. Those investors using this tax-free wrapper flocked to more defensive holdings such as multi-asset funds, absolute return funds and fixed income products, according to IA figures.

Laith Khalaf, a senior analyst at Hargreaves Lansdowne described the last minute ISA dash as “a bit of damp squib for the industry as a whole, compared to last year.” He added: “This is almost certainly attributable to risk aversion as markets have fallen off their perch since the record high achieved last April.”

Adrian Lowcock, head of investing at AXA Wealth pointed out that that Government policy may have contributed to this slump. A change in the stamp duty on second homes, which came into effect from the start of April, led many buy-to-let investors to bring forward purchases, reducing funds available for ISA investments.

He added that speculation that the Chancellor would cut pensions tax relief in his March budget led to a significant number of people favouring pension contributions over ISAs ones in the run up to the end of the tax year.

Woodford Waives Research Fees

Investors in Neil Woodford’s CF Woodford Equity Income Fund will no longer have to pay for research fees.

From the start of this month, these fees will now be absorbed by the fund management company, Woodford Investment Management, instead – rather than being passed onto customers. There will be no corresponding increase in the annual management charge.

This move lays down the gauntlet to the rest of the industry, where campaigners have been calling for greater transparency on fees for a number of years.

Most investors compare fund costs by using the Ongoing Charge Figure (OCF) quoted on fund factsheets, but this does not include transactional fees or research costs.

Woodford Investment Management said the decision to disclose research costs was part of its effort to be “open and transparent” about the costs associated with running an actively managed fund.

It said it also intends to disclose a complete breakdown of total costs “in an easy-to find and easy-to-read way’” on a single page on its website, which will be updated every month on a 12-month rolling basis.

Woodford Equity Income is currently worth around £8.5 billion. It estimated that these research fees accounted for around 0.02% of the value of the fund last year.

Lindsell Train Cuts Managers Fees

The board of the Lindsell Train investment trust (LTI) will reduce the management fee paid to its star fund managers: Nick Train and Michael Lindsell.

This change mean their fee is linked to the net asset value of the trust, rather than the premium the shares are trading at.

As one of the best performing global trusts, it has been one of the few equity-based trusts that has traded consistently at a premium in recent years. Over the past year the premium on this trust has averaged at 23% according to Morningstar data.

Under current arrangements that manages are paid a fee equivalent to 0.65% of the market capitalisation of the trust. This calculation includes any share price premium. From this month the fee is based on the fund’s net asset value (NAV) or - if lower - it’s market value. This means if the trust share fall to a discount this will be taken into consideration when paying the managers’ fees.

Barings Scraps Performance Fee

Baring Emerging Europe Trust (BEE)  is the latest investment trust to scrap its performance fee. The 10% performance fee was removed on March 31. Investors have been reassured there won’t be any corresponding rise to the annual management fee - currently 0.8%.

This follows a review by the board of charges on the £91.6 million trust. Last year the JPMorgan Emerging Market trust (JMG) also removed its performance fee.  Recent research from the Association of Investment Companies found that 10% of all investment trusts made improvements to fee structures last year, with a number removing performance fees entirely.

Rathbone Fund Kicked Out Of Equity Income Sector

Rathbone’s £1.2 billion Income fund, run by respected manager Carl Stick, is the latest fund to be ejected from the Investment Association’s Equity Income Sector.

The fund will be officially removed on May 1, after failing to meet the IA’s rules that funds in this sector must produce a yield of at least 110% of the FTSE All Share over a rolling three year period. This fund will now sit in the UK All Companies sector.

After a number of popular and high profile funds have been jettisoned from the Equity Income sector, the IA is now consulting on whether its criteria need to be reformed. These rules have been branded “archaic” by some in the industry.

Stick said that currently the FTSE All Share yield was distorted by the dividends paid by a number of mega caps. He said he believed that many of these payouts were “precarious”.

He added: “The market is distorted. If we were to use yield as our primary target we would put both our own growth in distribution under some threat, and we would be taking on far too much risk for our clients.”

Invesco Perpetual’s High Income and Income fund, collective worth almost £18 billion, Henderson’s £488 million UK Equity Income & Growth fund, and Schroders’ £1.4 billion Income funds have all been removed from the sector.

Chief Executive Quits Threadneedle

Campbell Fleming, the chief executive of EMEA at Columbia Threadneedle has left the firm to join rival fund manager, Aberdeen Asset Management.

He will become the Aberdeen’s global head of distribution, replacing John Brett who stepped down from this role last year. He will join Aberdeen’s board and report to chief executive Martin Gilbert.

Fleming has been with Threadneedle since 2009. Gilbert said: “After an in-depth worldwide search process, Campbell was identified as the outstanding candidate given his expertise and experience across client channels globally, including North America which is a key focus for us.”

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About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk