The average total expense ratio (TER) for investment trusts is lower in seven out of eight sectors than an Investment Management Association (IMA) equivalent, according to data from Winterflood Investment Trusts (Wins).
Last month, research by Wins showed that each investment trust sector except Japan had outperformed its open-ended equivalent over 10 years.
The use of gearing, uplifts from tender offers and buybacks and the tightening of discounts were just a few reasons suggested for this outperformance. However, one of the reasons not offered was low TERs.
Simon Elliott, the head of research at Wins, says: “This was a surprise to some who regard this [low TERs] as one of the main advantages of the investment trusts. Our omission was intentional.
“Although a number of investment trusts do have low TERs, particularly global generalists or well established UK equity income growth funds, many do not. This is especially true for more recent launches, which often have performance fees.” (article continues below)
Wins compared the TERs of the most comparable eight sectors for both open-ended and trusts. The research found that, with the exception of Europe ex UK, the TER for investment trusts was lower in seven out of the eight sectors. The data was calculated on a market capitalisation and asset weighted basis and was taken from the latest full-year reporting periods for the funds.
Elliott says: “In six of the eight sectors, the difference was greater than 25 basis points in favour of investment trusts. Although this has a relatively minimal impact in any one year, the impact over a an extended period, say 10 years, is considerable.”
”Boards have a responsibility to keep TERs as low as possible”
Elliott says there are two for this big difference. The first is investment trusts’ use of independent boards. “Boards have a responsibility to keep TERs as low as possible. This can be done by reducing base fees where performance fees have been introduced. While this means the TER might swing around, the boards will argue this is good as investors pay more when things are good and less when performance is not as strong.”
The second factor, Elliott argues, is that open-ended funds often have much higher marketing costs.
Putting the case for open-ended funds, Toby Hogbin, the head of product development at Martin Currie, says the TER of an open-ended fund reflects the cost of trading. “With an investment trust the TER is not necessarily a reflection of the entire cost because the cost for advice and the cost of trading have not been included.”