Trusts’ illiquidity is still a deterrent

Multi-managers are still put off by the illiquidity of investment trusts despite a report that shows charges on closed-ended vehicles are falling.

According to the Association of Investment Companies (AIC), the total expense ratios (TERs) of investment trusts have fallen for the fourth consecutive year, with 34% charging under 1% and 70% below 1.5%. The lowest cost fund – the Independent Investment Trust – has a TER of just 0.23%.

Using Lipper figures, Fund Strategy compared the average TER on closed-ended and open-ended funds to find that investment trusts were on average 63 percentage points cheaper on an asset-weighted basis. Even when performance fees on investment trusts are included the TER is 1.06% compared with unit trusts and Oeics’ combined average of 1.63%.

Despite this, multi-managers continue to shun investment trusts. Mark Harris (pictured), the head of fund of funds at New Star, uses just two closed-ended funds and says the main reason he avoids them is that they are highly illiquid. “People use investment trusts by buying at a discount and trading out when the Net Asset Value (NAV) is at a premium,” he says. “So not only do you have to watch the share price, you need to watch the supply and demand.”

He points out that if the fund is outperforming by 25% but trading at a discount of 25% the investor does not benefit. “The illiquidity offsets any saving in TER,” he says.

Tony Lanning, the head of Gartmore’s multi-manager range, uses closed-ended vehicles only to gain access to hedge funds of funds, but he generally steers clear.
He says: “ We do like investment trusts, but because of the amount of money we run, the liquidity is an issue. If we want to take a position there will be large constraints when we want to exit.

“We do not aggressively play our hedge fund exposure and we are not buying these because they are on excessively wide discounts. It is just the only way we can access [this asset class].”

Lanning adds that while he is concerned about keeping TERs as low as possible, it is necessary to pay more for certain strategies.