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Henry Cobbe, from Elston, unpicks the battle raging around investment trust disclosure and what it means for managing portfolios

Henry Cobbe, founder and Head of Research at Elston Consulting, explains the background to the battle around investment trust disclosure, explaining what remains important and what advisers need to know, amongst all the noise and hoo-ha.

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Transcript

Bella Caridade-Ferreira

Hello everyone and welcome to the next edition of the Cut Through the Noise podcast. With me in the studio today we’ve got the wonderful Henry Cobbe, our second time with Henry. Henry is the founder and CIO of Elston Consulting, and a portfolio expert. So welcome, Henry, lovely to have you here.

Henry Cobbe

Hi, Bella. Thank you for having me again.

Bella Caridade-Ferreira

No problem, it’s lovely to have you here. So look, Henry, I’ve been reading and watching with intrigue, the battle around investment trusts and I think it all really kicked off really with an article in Money Marketing by Ros Altmann. I think it was in November 2023 which has kind of sparked this massive debate and everyone’s polarised on investment trusts et cetera. You know, I don’t quite agree with some of the stuff she’s saying, and the reason I’ve invited you on today is to talk that through with you, because some of it doesn’t sound right to me, but maybe I’m just being really thick and I’m just not technical enough.

Henry Cobbe

That’s not going to be the case Bella, don’t try that one on me.

Bella Caridade-Ferreira

But I don’t think I’m technical enough really to understand some of this stuff. So there’s a couple of things that I want to bring up firstly. In this article in November, Ros says that investment trusts have to report the so-called underlying charges, including management fees, admin and legal fees, as ongoing charges, and that is wrong. Now, she and the AIC have been fighting the FCA over this and telling them that they’re doing it all wrong. So give me a little bit of history, please, on that battle. Just give me a little bit of a truncated history on what’s going on and when did it start and where it’s going.

Henry Cobbe

Well, I think, first of all, it’s worth saying that, you know, investment trusts are a very useful and key part of the retail investment landscape. They’re the first instrument to democratise investing. So back in the 19th century when the idea was that anyone could participate in capitalism by buying a share in an investment trust. They would then raise money and go off and do wonderful things across what was the empire back then. So, it was a way of making it that anyone on the street could effectively buy a share on the stock exchange and participate in a growth story, and so at its core, I think investment trusts are fantastic vehicles and in a way, they’re the first original exchange traded fund, but now it would be called an actively managed exchange traded fund if you like.

Bella Caridade-Ferreira

Yes.

Henry Cobbe

So, they’ve got a great role to play and they’ve also got a great role to play in really, kind of hard to reach specialist markets. So, let’s say you have a portfolio of wind turbines. That’s quite hard to hold in an OEIC with daily dealing rules, et cetera, but actually very, very straightforward to hold an investment trust. So, investment trusts have a key role to play, and the way that they’ve traditionally been viewed by regulation and by, therefore, the FCA, is they are a retail collective investment scheme. So, retail collective investment scheme is what we call a fund and there’s different legal entities that make up a fund, so it can be an OEIC, an open-ended investment company, a closed end investment company which is an investment trust or an authorised unit trust which is trustee structure, but it’s still a trust, or an exchange traded fund, which is a fund listed on an exchange.

So those are all different legal formats for a retail collective investment scheme or fund, as a way of basically a manual to buy something to get access to something. Then, what happened was under EU rules, when we were part of the EU, they introduced a suite of legislation called the PRIIP standards, which is P-R-I-I-P, which stands for package retail investment and insurance products. What that aimed to do was set up a level playing field for cost disclosures, so that whether you’re comparing an OEIC, a unit trust, an ETF or an investment trust, the all-in costs were like for like and cross comparable.

Bella Caridade-Ferreira

So, a level playing field for all costs. Comparing like with like, not apples and pears, apples and apples.

A level playing field. 100%. Exactly because if you remember the olden days before that, I mean, when I first started looking at funds in the, I don’t know, the late 90s, early noughties, they were all marketed based on their AMC.

Bella Caridade-Ferreira

Yeah, they didn’t have the ongoing charge figure, yeah.

Henry Cobbe

No, no one knew what the ongoings were. You just had, ‘oh that one’s 1%, AMC, that one’s 0.9 AMC.’ But you could have a situation whereby a 1% AMC fund had 20 basis points of additional charges, whereas the 0.9 had 1% of additional charges.

Bella Caridade-Ferreira

Yeah. So, you needed more than just the AMC, yeah

Henry Cobbe

100% Otherwise it’s open to, you know, manipulation and guff, basically. Because everything got sold in the olden days on the headline AMCs.

Bella Caridade-Ferreira

All the expensive stuff was shoved into the other costs that weren’t being declared openly yet.

Henry Cobbe

Exactly. So, we have this concept of what we call fee drag, which is, what is the aggregate all in costs which are going to separate between you, as the investor, and your investment portfolio, which is the fund you’ve bought. Because in the long run, you know, I think we all have a right to know how much it’s going to the suits, as it were. OK, I wear a suit, I am a suit, so I can count that. How much is going to suits and how much you get to keep. So, let’s say you buy a fund of funds, like a multi asset fund, a readymade multi asset fund, but they both have AMC’s of 0.3. One has an OCF of 1.5, the other has an OCF of, also 0.3.

Bella Caridade-Ferreira

Well, you should be going for the one with 0.3 OCF.

Henry Cobbe

Well, you go, with whichever one you choose but if I want to be able to estimate the fee drag and how much my returns get dragged down by, I need to know the OCF of both to work out that fee drag. So, for me that kind of PRIIP standard disclosures, harmonised disclosures, aggregated cost breakdowns is super helpful. Because it means you can, if you want to buy, say, UK equities, you can buy a UK OEIC. You can buy a UK unit trust. You can buy a UK ETF, you can buy a UK investment trust, there’s several different ways, you can have it actively managed, you can have it passively managed. You can choose whatever you want to do, but you want to be able to compare the all-in costs, so you can know what the fee drag is on a like for like basis and whether the additional cost is worth the additional, civil or performance or whatever you’re hoping for.

So, I like the PRIIP framework. Because, as a fund selector, if I put my suit on and my fund selecting hat on, I want to compare things on a like for like basis and I think you know we’ve all been there pre-RDR and pre-OCS when funds were marketed on headline AMC when it’s just open to abuse. So, I don’t want to go back to those dark old days.

Bella Caridade-Ferreira

OK, well so far so good, I get all of that. What are the AIC and Baroness Ros Altmann, so het up about. It sounds to me like they’re saying that a lot of these costs shouldn’t be included. In fact, I’m looking at Ros Altmann’s LinkedIn and she’s got a message on there, which was posted yesterday and she says on this message and I’m going to quote it, Henry, ‘closed ended listed investment companies have no’,in capital letters, ‘ongoing cost of ownership. The investor is shown all expenses incurred to run the company, but investors do not pay them directly. Open-ended unit trusts, OEICs, charge fees to the owners of their units, usually monthly, deducted on an ongoing basis from the value of investor units, so investment trusts and REITs’, or REITs, whatever you call them, ‘have no ongoing consumer fees or OCF costs to investors. These are expenses that are incurred by the company and not deducted monthly from people’s share value.’ Now, that doesn’t make sense to me.

Henry Cobbe

It’s half right and half wrong. Half true and half absolute guff.

Bella Caridade-Ferreira

I love it. Good. Let’s get into the guff bit. Yeah, good.

Henry Cobbe

OK, so, look, from a technical perspective, that’s true. You know, fund fees are deducted from the fund NAV of an OEIC, and therefore your net return is net of the OCF, including the cost of the ACD and the accounts and the legal and all the running cost of a fund. And the investment manager of course, the AMC. So, the investment management, all the costs are in the OCF, that’s fine. You know where you stand. Yes, they are deducted from the unit value of the fund and therefore you get the net return, net of OCF. We all know where we stand.

If you have an investment trust, what’s wrong and right? It’s true, when you buy a share, you just buy the share at that share price, and when you sell the share, you sell the share of that share price. There’s no additional costs of ownership apart from the dealing cost of buying the share, dealing cost of selling the share. You get share price on the way in and you get the share price on the way out. But what is the share price reflecting, the share price is reflecting it’s either being sold at a premium or discount to the NAV of a fund, in the same way as an OEIC has an NAV, which is always stable. It’s the daily NAV that you see at 12:00 that you see from an OEIC. An investment trust also has a NAV. But the share price can fluctuate around up or below the NAV. Now that NAV is in a way the true value of the trust. It’s like, let’s say, you have a portfolio of wind farms, that’s the value of the wind farms.

Let’s say you have, imagine a simple case, let’s imagine an investment trust that owns all the shares in the FTSE 100. So, it’s like a FTSE all share investment trust. You have all those shares, the NAV of that investment trust will move around with the value of the FTSE all share shares that are inside it, but in addition to that, there’s the investment management fee of the manager. That has to get deducted from somewhere, so it’s going to get deducted from NAV. Then equally there’s the legal cost, there’s the audit cost, there’s the accounting cost, there’s the listing cost. So, they are disclosed to the investor, as Ros Altmann says, but they are charged the NAV of the fund. The money’s got to come from somewhere.

Bella Caridade-Ferreira

Right. Yeah, exactly. No one’s gonna do it for free, right?

Henry Cobbe

No, no. So those people have to get paid, the auditors have to get paid. They pay out of the money from the investment trust so that is effectively a cost. So I want to know, again as a fund selector, all those admin costs, is it being done efficiently or inefficiently? So if I want to compare the expense ratio of one investment trust, relative to NAV, versus the expense ratio of another investment trust relative to NAV, and if one of them is extravagant, profligate. Having huge, in the old days, you know those big City of London, they’re spending a huge amount of audit fees.

Bella Caridade-Ferreira

Wood panelling, offices in Mayfair. Whatever it is, yes.

Henry Cobbe

I want to see what that cost ratio is and if another one’s running a very lean things, they only have Pret a Manger sandwiches at board meetings and they’re not having the full Savoy Grill, then equally they’ll have a lower expense ratio relative to NAV. So again, effectively, how efficient has that company been running? And yes, it’s in the fee disclosure of the KID document, which we all know many retail investors don’t actually read. But that way you can see, ‘how efficiently is this investment trust being run?’ So the true bit is, there’s no deduction from the share price of investment trust of fees, but implicitly, as it is deducted from NAV, let’s say you buy an investment trust at 10% discount to NAV and then performance is what it is, but they have higher running costs for the investment trusts. When you sell your investment trust at 10% NAV, you have effectively worn those costs because the share price, if you hold that constant versus NAV, those costs are coming out of NAV. They’re not, they’re not coming out of nowhere. So I don’t really get this argument.

Bella Caridade-Ferreira

Yeah. So then therefore it does affect the share price.

Henry Cobbe

Well, it does. Of course it does, because you’re not explicitly explaining the cost of when you buy a unit trust. If you buy a FTSE tracker OEIC with that price and you set it a year later at that price, you haven’t had to pay any money, you just got the unit in one and the unit in the other. But the NAV’s been chipped away by all the running fees of the OEIC. That’s the same with investment trusts, but the difference is you have this thing whereby if you bought at a 10% discount and you sell it a year later at 10% discount the roughly speaking, the difference will be the change in NAV, but you have this other slightly more random bit whereby, the discount or premium to NAV can move around so you don’t actually know what you’re going to get.

I think it’s disingenuous to say there’s no ongoing cost because in a way you could set up an investment trust that, all it did was bleed costs and fund a wonderful manager lifestyle and doesn’t invest any money. So you’ve got to know what the expense ratio is and if you’re buying something to hold its NAV value and hope its NAV value goes up. If they’re squandering on expensive running costs, then your NAV will go up by less and therefore the premium discount that you sell when you exit versus NAV will also go up or down reflectively. So it’s true factually, but it’s also guff in spirit.

Bella Caridade-Ferreira

I like it, guff in spirit, right. Remember that everyone. So I mean, this is what the AIC is saying then, right, and Baroness Ros Altmann. What is the FCA saying?

Henry Cobbe

Very little.

Bella Caridade-Ferreira

Very little at this stage. Right.

Henry Cobbe

Yeah, they’re just getting shouted at.

Bella Caridade-Ferreira

So they’re getting shouted at and screamed at, and a lot of people are making the point that the FCA has interpreted the rules differently from Europe, from the EU, and that they’re not including these costs for European investment trusts. Is that the case?

Henry Cobbe

Well, I don’t know enough about the European investment trust market. If there is one. I’m not sure there is a big European investment trust market, so, what the FCA are saying is that if one wasn’t to include all the costs that are required to be included under the PRIIPs rules which we’ve inherited from the EU, then you need new legislation because you’ve basically given them a free pass saying well, don’t worry about those costs, they don’t count, we can brush those under the carpet and just focus on the AMC.

So I think, we’ll not worry about European investment trusts. We want to make sure that UK investment trusts, UK ETFs, UK OEICs and UK unit trusts are cross comparable, so I don’t really care too much what’s happening with European OEICs because UK investors aren’t buying European OEICs, they aren’t buying European investment trusts. So we want a level playing field in terms of products available to UK retail investors and that’s what would be the focus, and I think what the AIC is saying is that these additional costs should be removed, whereas I think the cross-comparability is helpful. So the FCA basically saying, not much, and that’s getting people even more frustrated because they feel they should be taking urgent action, but they’re just simply saying, ‘if you want to change the rules, you’ve got to change the rules. You can’t just opt out from it.’

Bella Caridade-Ferreira

So the AIC and Ros Altmann are sort of arguing the fact that this cost disclosure is damaging the market for UK investment trusts, and that flows have come down, people aren’t buying them, they’re not investing them. Some platforms have obviously listed some of these investment trusts as very expensive, with them, you know, as part of their cost disclosure. So, everyone’s really screaming about that. And again, do you think that that is the case, has the cost disclosure on its own, negatively affected the investment trust market.

Henry Cobbe

Well, I think the cost disclosure and PRIIPs rules have already been there, but the reason they came into so much focus was because suddenly the investment association, well the fund of funds were reminded that they had to include the underlying cost of investment trust holdings in their OCF too, and that’s when it really sort of got more heated.

Bella Caridade-Ferreira

Right.

Henry Cobbe

So that suddenly if you’re a fund of funds, if you’re an OEIC that owns both, ETFs inside it and investment trusts inside it, you’d have to show the impact on your OCF of holding their OCF as it were. So suddenly, fund of funds suddenly look more expensive then it became an even bigger hoo-ha in a way. So I think that’s when it started getting more acute, because the PRIIPs rule had been in place since 2018, there’s nothing new about them.

But I think where it’s got more urgent is because it’s also impacting the fund of funds, and platforms have got to do their job. So under the consumer duty rules, platforms are thinking ‘oh what is this cost, fees and charges? What’s the impact on the investors?’

So, yeah, there were some high profile removals of some investment trusts from advised platforms because they felt they weren’t offering good value for money in terms of their costs and charges disclosure, and, so that’s tricky because platforms, everyone’s got this consumer duty principle and obligations and everyone has to do right by it.

I think, in a way, the way I see it is that, you come back to that thing of like, let’s say you want to buy in the UK equity market, you’re going to buy an ETF, you can buy an active fund, you can buy a passive fund. You can buy it through an OEIC structure, unit trust structure, investment structure, ETF structure. Those are all choices. You want it to be comparable and I think, sorry, your question was about discounts and why there’s such a malaise in the investment trust sector.

So I think it’s actually three things. One is that actually there’s been a general outflow from UK equities generally. You’ve seen that in fund flows statistics, everyone’s thinking oh there’s not much growth here, let’s go to the US and other markets. So there’s been people who’ve been deallocating from UK equities and reallocating to US or global equities. So that’s one trend that’s to do with the structure of the UK market, nothing to the investment trusts, that’s just demand.

Bella Caridade-Ferreira

Agreed. Agreed. Yeah. We see that in our stats, we see a massive shift away into global and US for sure.

Henry Cobbe

Exactly. So, in investment trusts, the premium discount to NAV is a function of supply and demand. So the NAV could be going up, like the FTSE 100 is going up. But if everyone’s selling, selling, selling, on an OEIC, you just open up the OEIC as open-ended, reduce the number of units and then nothing changes. With an investment trust, that selling pressure, because there’s a closed number of units, increases the discount. So one is UK fund flows and that’s nothing to with investment trusts, apart from their structure.

The second one is, you know, there’s so much more choice available. In 1888 or the 1880s, whenever the first investment trust got going, if you’re a retail investor with £20 or shillings or whatever to invest, that was your only option. Whereas now there’s thousands and thousands of funds and ETFs to choose from, so you’ve got to be relatively competitive versus those other vehicles from a performance perspective and a fee perspective.

So that’s the other thing, there’s so much more choice. And I think in a way the investment trust format, I think is great for specialist things like you know if you think about, I’m not going to mention any names, but like you know alternative energy, green energy or something, you know, clean energy. You can’t hold that in an OEIC. It’s great for holding a wind farm in an investment trust. Equally, for some things, like if you think about some of the more, like, family office style investment trusts where it’s not just direct equities, but it’s some hedge funds, it’s some land, it’s all sorts of other things. Fantastic to hold that in investment trusts. But equally for some things, what I call vanilla exposures like US equities or UK equities or Japanese equities. Why the investment trust structure?

Bella Caridade-Ferreira

No, you don’t need it.

Henry Cobbe

I think it’s a bit like, if you have an antiquated car, if you have a beautiful old, you know, 1950s Rolls Royce. Yes, it’s beautiful. Yes, it’s well made, but the service costs are through the roof, because they’re expensive to run. Whereas what a lot of people might need is a Ford Transit van, which is cheap to run.

Bella Caridade-Ferreira

Well, I mean, if you’re looking at the US market, you just need an index tracker, right. It’s an efficient market.

Henry Cobbe

That’s your view, Bella. That’s your view. There’ll be lots of views out there. I think there are, look, there are some markets where passive makes sense. There’s some phases of the market where passive makes sense, but it depends on what’s happening in the market. Right now, actually, I think there’s a strong case for active in the US just to manage concentration risk.

Bella Caridade-Ferreira

That’s a good point. That’s a very valid point, yeah.

Henry Cobbe

Well, you shouldn’t be dogmatic about it. I think it’s come almost like a battle of faiths that active passive debate.

Bella Caridade-Ferreira

Yes, it has, hasn’t it? Well, especially with index trackers, they’re quite evangelical about it as well. So we definitely don’t want to, that will be a podcast for another day. Active passive debate.

Henry Cobbe

Faith or reason?

Bella Caridade-Ferreira

Yes, exactly, exactly right. So look, I just want to come back to Baroness Ros Altmann, and this is not at all about bashing her in any way. But she’s introduced a private members bill in the Lords, because that’s how strongly she feels about it. Part of me wonders whether she isn’t being paid by the AIC. But anyways, so, what’s your view on that? I mean, is that likely to succeed? Does she have a lot of people on side? Do they need to know how it all works?

Henry Cobbe

Well, I think there’s a huge groundswell and there’s a very successful campaign in a way, of getting people aware of this issue and look, you know, it makes sense to help the investment trust sector, the investment trust sector has a great role to play. But I think it has to play it on a level playing field. So it’s kind of, and also I think one has to differentiate between what I call vanilla investment trusts, which just hold shares like you know, UK equities or US equities and specialist investment trusts which hold wind farms.

I think that’s probably where you need a bit more fine tuning and I think you probably need a consultation of some sort, because at the moment this is all happening slightly behind closed doors. You know, in actual fact, the House of Lords have just written last week, one of their committees has just written to the FCA saying ‘what are you doing about this? We need an answer now’, but there’s no consultations yet. There’s just like, this huge agenda being pushed, it’s being fought out in the media. I don’t think that’s particularly helpful, I think there needs to be a debate, but it needs to be a debate where all participants are thinking about it. In fact, the private members bill to get investment trusts in their own regime, get them out of having to do the PRIIPs disclosures and effectively they just have to say what their AMC is and then that’s it.

Bella Caridade-Ferreira

That’s not really a good result for retail investors, really.

Henry Cobbe

Well, no. For retail investors, it makes it more straightforward. But for professional investors, like if investment trusts, I can say this with the investment manager hat on, for professional investors, if investment trusts didn’t have their PRIIP disclosure obligations and you can’t do that cross comparison, I’d never go anywhere near them.

Bella Caridade-Ferreira

You wouldn’t go anywhere near them, yes. Because you need to know what the full extent of the cost is, yeah.

Henry Cobbe

Yeah, so, what I would have put forward, if I was trying to kind of try and, you know, I don’t like all this kind of polarising chat, I don’t think it helps anyone.

So if one was trying to find the kind of impartial mediator, middle ground is saying look, we understand your concerns and we understand your concerns, I think the middle ground is that, the PRIIPs format, if they want to not have that on the KID document, well, you know, fine. I don’t think it will affect investment behaviour at all actually, but then equally, it’s got to be somewhere on a voluntary disclosure basis so that professional investors who actually care about this kind of stuff can analyse it, see it and carry on getting that thing. So I just don’t think you can walk away from disclosing the running cost of your vehicle.

So I think there needs to be a consultation. I think it needs to be all slightly de-escalated and less emotional, and I think that should be a helpful step forward saying that these are the issues, these are concerns. It shouldn’t be having a special status or special favours, unless one agrees that these are no longer retail collective investment schemes and they’re actually just shares. But then, they’re being marketed as funds, so they’ve got to be treated as funds.

Bella Caridade-Ferreira

Yeah, or otherwise, they have to be marketed as shares and treated, yeah, as shares, exactly.

Henry Cobbe

And that’s a different thing, but it’s complicated. We just need to see a bit of calm and a bit of common sense, but at the moment it feels very one-sided, we’re not hearing really much from the FCA back, because their job isn’t to go out there and shout from the rooftops, they’re there to basically, interpret legislation and ensure consistency, which is what they’re doing, and that’s why they’re stock responses: ‘If the law changes, we’ll update the procedure.’

But I think what’s difficult is, it’s not a magic wand. This fee disclosure, fee transparency, I think is a backward step for transparency. If that fee transparency goes away, well then, investment trusts will be heavily sold and heavily marketed saying, oh, look, it’s a zero AMC or 0.4 AMC or 0.5 AMC. It’s the same cost as a tracker.

Bella Caridade-Ferreira

Misleading marketing, yeah.

Henry Cobbe

We’ll go back to that pre-RDR world whereby, ‘I’ll tell you what the AMC is, but I won’t tell you the whole picture.’ So you never work out your fee drag and then people sit there having bought it saying ‘it’s only a 0.2 AMC’, then years later, wonder why their share price hasn’t appreciated much, cause the NAV hasn’t moved much because it’s all been consumed to either investment performance or fee drag, and you just, you’ve got no idea how much is it, how much is it because of performance, how much because of fee drag? Oh, I don’t know, because there’s no cost and charges disclosure, so I’m clueless.

Bella Caridade-Ferreira

I mean, as you said earlier, you’re a professional fund selector. Do you prefer to use ETFs in funds or you know, do you use investment trusts a lot in your portfolios, or are they a vehicle that you steer clear of?

Henry Cobbe

So it depends if it’s in a model portfolio format, building multi asset model portfolios for advisors, we tend to steer clear of investment trusts because operationally, dealing them at scale on platforms is a real problem. So, any advisor running their own advisory portfolios will have exactly the same problem.

So let’s say you want to buy, if you’re running a model portfolio, you’re setting percentage weights and then when you send the dealing order, it goes through to the platform, it sends out in terms of deal value weights and actually, we’ve been working with a a mid-size advisor firm who’s been using a lot of investment trusts, even trying to shift the volumes, buy or sell, you end up actually, even trying to move 1 million, 2 million, £3m order in investment trusts.

Bella Caridade-Ferreira

It can take a while.

Henry Cobbe

It can take a while, and so we want, or the advisor we work with, they want their clients to be fully invested all the time. They want to be invested in the proportions they want to be invested in. So that’s the whole point of a model portfolio. So if one was actually having to work these orders and it’s all a bit of a psycho drama, and actually the other thing is you can actually move the price, because if it’s significant order-

Bella Caridade-Ferreira

Yeah, because if it’s not a huge investment trust, then it’s a significant order.

Henry Cobbe

It’s nothing to the size of the investment trust but everything to do with the amount of liquidity.

Bella Caridade-Ferreira

Right. OK. Yeah.

Henry Cobbe

If there’s very particularly large daily trading volumes and it’s all on screen because there’s not much else apart from that, and you put in the big order, you are going to move the price and so, although it’s attractive because it’s on discount to NAV by the time you put your buy order in it’s suddenly a premium because you’re the only buyer on that day.

So for an individual investor, who’s sitting on his Hargreaves Lansdown app or their interactive investor app, and they’re putting their £100 here, there, or £1000 in there. No problem, it’s fine. Investment trusts are easy to trade, no problem. They’re just like buying a share.

But for buying bulk model size orders where you’re putting in £1m, £2m, £3m, it’s a huge order that can actually, for a smaller investment trust, will move the market and has to get worked, and therefore it takes time. So, in the model portfolio landscape, investment trusts are tricky and we think it becomes almost too complex, from a from a trading perspective. Where you would consider holding an investment trust is inside an OEIC, ironically, which is what a lot of fund of funds do.

Bella Caridade-Ferreira

Oh yeah, because it’s within, whatever happens within it’s-

Henry Cobbe

Yeah, but you’ve got to be, obviously, mindful of the liquidity profile. So, I would never have, we would never look, will never help anyone build an OEIC that was full of 100% in investment trusts because again, you’ve got the same liquidity problem. You’ve got a daily dealing OEIC, but you’ve got a not quite daily, well, you’ve got a daily investment trust, where you can actually impact the underlying asset prices. But having you know 10, 15, 20 percent in investment trusts, if you want.

So, let’s say you want to do an alternative allocation, you want to have things like wind farm investment trusts. Having a moderate allocation within an OEIC structure is a way of solving that, because you’re holding it alongside highly liquid instruments as well, and so you can manage liquidity much better. So yeah, investment trusts, yes, inside an OEIC, if we were helping a firm build some OEICs like that, no, inside a model portfolio I think, but they are great for the retail investors to buy in their small order sizes when they’re not moving the price.

Bella Caridade-Ferreira

I’ve got quite a few investment trusts, now I’m going to go look.

Henry Cobbe

But you’re not moving the price, Bella. Unless you’re not telling us something. They call you Bella Buffett in the evenings.

Bella Caridade-Ferreira

Bella Buffett. I love it. No, I mean, I’m going to go and have a look at them now and see what kind of, some of them have performed really, really well. But I’m gonna go and have a look at the cost disclosure now, of all of those investment trusts that I own.

Henry Cobbe

Yeah, so you’ll have it on the KID and you’ll have it, should be in annual reports and accounts. And it will be on the platforms in terms of the EMT files that fund providers provide to platforms, it should be coming on through the platform thing, but you know as I say like for specialist exposures, where it is really exciting, like if it was clean energy, whether it might be like that. Then why not?

Bella Caridade-Ferreira

Yeah, absolutely.

Henry Cobbe

It’s diversification, it’s interesting, it’s different, it’s differentiated, it’s true active. It’s genuine active management. Go for it.

Bella Caridade-Ferreira

But not for bog standard vanilla equity.

Henry Cobbe

Well, maybe, because maybe the manager’s fantastic, maybe the use of leverage is quite helpful. But you’ve got to be able to compare it against the active OEICS against passive OEICS, against active ETFs and passive ETFs. You’ve got to compare these vehicles on a like for like basis, and for that you need the PRIIP standards and for that you need the common ground for fees and costs and charges.

Bella Caridade-Ferreira

OK, so it looks like we’re still a long way off having any kind of result on this really. It’s a very public battle. What do you think’s going to happen next?

Henry Cobbe

I think the vociferousity will continue. If that’s a word. Vociferous. Vociferousity.

Bella Caridade-Ferreira

Yes, yes.

Henry Cobbe

The vociferousnessness? Will continue. Anyway, there’s a broader thing which is to support the UK stock market generally, as a policy thing, and I totally agree with that too. We want to have a thriving London Stock Exchange, you know, and I think as a city based firm, I want to see that too. We should be helping companies from around the world who want to come and list in London, you know, we should be helping tech companies that are in the UK, want to list in London.

Bella Caridade-Ferreira

Yeah, they’re all going somewhere else. The regulator’s totally screwed that one up as well, really.

Henry Cobbe

Well, I’m not sure it’s just the regulator, it’s also, you know, it’s also not the FCA, but also, well, it’s more complex than that, I think.

Bella Caridade-Ferreira

It’s a bit more complicated.

Henry Cobbe

But, we want to have a thriving city, but the investment trust sector is only one part of that, and I actually personally think that hiding the full picture of charges on investment trusts would actually kill them stone dead. Because any professional investors that are still using them-

Bella Caridade-Ferreira

Will just, yeah, will just steer clear

Henry Cobbe

Yeah, I think so. So I think it’s in a way, yes, it’ll be great for marketing to retail, but it’ll be I think a step backwards for professional investors who are considering them. So I think they’ve got to be careful what they wish for.

Bella Caridade-Ferreira

One last question, you brought up the UK stock market. Obviously the Chancellor in his last budget announced the UK BRISA, the BRISA, the British ISA of £5000, well, we’ve got no detail on it and it will be introduced next year. But what struck me as well is that the AIC immediately said, right, ok, investment trusts should be included in the British ISA. Is that, I mean, when I look at investment trusts now, they’re often invested around the world, is that right? Would it be right, do you think, to include them in the British ISA, just because they’re listed on the British Stock Exchange?

Henry Cobbe

I think it should be based on the underlying holdings, and so whether the threshold’s 70%, 90%, I think it should be 100% personally, or maybe 90, 95, 100. Something in the 90s, it should be what the underlying holdings are. So you’re absolutely right, an investment trust that invests in US equities, that shouldn’t count. But an investment trust that invests in UK equities, that should absolutely count. Equally, it shouldn’t be by domicile either. So, like ETFs, very popular ETFs, a lot of them are domiciled in Ireland. They’re Irish funds, but they’re listed in London.

Bella Caridade-Ferreira

So they should be included, yes indeed.

Henry Cobbe

But if they’re tracking the FTSE 100, they’re tracking 100 companies. They’re tracking British domiciled companies, so it should all be about, what’s the underlying fund. So we think it should be, OEICS that hold UK shares, investment trusts that hold UK shares, and ETFs that hold UK shares, regardless of where the fund or ETF is domiciled, whether it’s a Lux fund or a GB fund or a Dublin fund. So what, does it hold UK shares? So retail authorised, UK underlying shares and that’s what we’ll be putting in our consultation response. We’ve got till the end of June, I think, to send it in.

Bella Caridade-Ferreira

So you’re going to be doing a consultation?

Henry Cobbe

Oh I love a consultation response Bella. It’s a bank holiday weekend, you get to tea time. You think oh!

Bella Caridade-Ferreira

What shall I do? Go and do my consultation, oh, hilarious.

Henry Cobbe

Love consultation, but I always say, if you don’t have your say, you know you haven’t had your say. There’s no point getting worked up in the chat rooms on LinkedIn or comments section of the press. You might as well just write in and have your say.

Bella Caridade-Ferreira

Absolutely. So, do you think, just to end on that note, do you think the British ISA is a good idea?

Henry Cobbe

I think it’s a great idea because any more tax free long term investment vehicles available is great news for investors. But I think what’s going to be a challenge is for, you know, we mainly work with financial advisors so, in the platform’s world, separating out might be quite hard. And I think some people have been thinking, ‘oh, how do I, how does that affect my asset allocation?’ Because if I got, let’s say, 500 grand in an ISA portfolio and then there’s £5000 extra from my UK ISA, you know, do I need to adjust my strategic asset location and I think in a way it’s easier just to segment it thinking, ok, here’s my main ISA, which is globally diversified and that’s, whatever it’s got in it multi asset, single asset or whatever, here’s my part of my overall portfolio and then your UK ISA is just a kind of a UK equity fund of some sort, be it active, passive. index, ETF, or unit trust, whatever.

Bella Caridade-Ferreira

Whatever it is, investment trust, whatever. Yeah.

Henry Cobbe

Yeah. So, I think it’s a great way to support the UK market and in a way if you think about that £5000 out of £25,000, it ends up being a 20% allocation to UK.

Bella Caridade-Ferreira

Is it enough? Should he have gone higher?

Henry Cobbe

No, no.

Bella Caridade-Ferreira

No, you don’t think he should’ve higher?

Henry Cobbe

No, no, because I think the whole point of long term investing is to reduce dependency on the state. So the whole point of doing your own SIPP, doing your own ISA is to build up your own retirement pot so that you’re not dependent on the state in old age. So we should be seeking out growth wherever so growth may be, be it the US equity market, be it the Chinese, be it emerging markets. You should be able to go anywhere you want for growth and the more growth you have your ISA portfolio, the less dependency you have in old age and retirement, so, you know, and I always give the example, if we were based in Zimbabwe, you could only invest in the Zimbabwean stock market, you’d be pretty disappointed.

Bella Caridade-Ferreira

You’d be screwed.

Henry Cobbe

I’d just say disappointed.

Bella Caridade-Ferreira

Haha, no screwed. Come on, Henry.

Henry Cobbe

But, having that opportunity to be a global investor is really important, I’d be really cross if the government said ‘hi, guys, you can only invest in the UK stock market’, ironically, in the 1990s we are telling all these countries like Poland who only allow their funds to invest in Polish stocks, ‘global, make it global so we can manage it’, and they have done that. So there’s very few markets now where you can only invest in domestic stocks. So I think that would be wrong, but I think having a special incentive saying here’s a UK ISA and I think most people stick it into a UK tracker and then that’s that done. But I think it’s a good initiative, because it’s more ISA allowance, and also they’re not trying to tell us what we can do with our 20 grand allowance, so that’s fine. But if it’s a 5 grand a year extra, brilliant, stick that into a UK equity fund of any vehicle, be it investment trust, ETF, OEIC. But to do that I want to compare my cost and charges disclosures.

Bella Caridade-Ferreira

Yes, indeed, and on that note, Henry, thank you very much. It’s been really entertaining talking to you today, on the fascinating subject of investment trusts and cost disclosure. So thank you, Henry.

Henry Cobbe

Thank you, Bella. Well, I think it is a fascinating subject and I actually had the honour of meeting up with a financial journalist for drinks one evening, just purely socially, and once I discovered that we were in the in the same sphere, we actually spent most of the evening discussing investment trusts, costs and fees disclosure and I thought that, for me, was a great outcome. It was really an evening for me.

Bella Caridade-Ferreira

You’re such a geek, Henry. You’re such a geek.

Henry Cobbe, founder and Head of Research at Elston Consulting, explains the background to the battle around investment trust disclosure, explaining what remains important and what advisers need to know, amongst all the noise and hoo-ha.

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