The outlook for investors in sustainable long term investments in infrastructure, alternative energy and real estate is now much brighter — thanks to action by Treasury ministers.
They have responded to the crisis surrounding the UK investment trust sector by urging the Financial Conduct Authority to issue emergency guidance on costs disclosures.
Over the past couple of years, misleading charge disclosures forced many investors to sell their holdings in UK-listed investment companies. This led to widespread selling and large discounts, that prevented new inflows into this once thriving part of the UK investment landscape. The problem has also damaged the UK equity markets as a whole and the wider economy.
This issue may be of particular interest to many in the DC workplace pensions sector, with closed-end investment vehicles, like investment trusts, often used to invest in less liquid assets, such as real estate and venture capital.
Investment trusts have been a long-standing success story for Britain, and had brought
billions into sustainable investments, infrastructure, real estate and smaller growth stocks, but this flow of money dried up as the regulator required investment trusts to
display inappropriate information to investors. That information suggested that UK investment trusts were charging investors a management fee to just hold their shares, which is absolutely not the case.
The wide discounts for investment trust shares have prevented new fundraisings by investment trusts who were backing sustainable growth businesses and other vital long term investments. This cost exaggeration also starved the very sectors of the economy which Government needs to boost, of capital for new projects or investment expansion. It is estimated that the economy has lost perhaps £30billion of potential investment.
The House of Lords gave wide cross party support for legislation to remedy this regulatory failure, and a Private members Bill earlier this year sought to ensure shareholders were clearly informed about all charges so they could compare them with open ended collective investments properly.
Most recently the FCA put out another statement at the end of September, emphasising again that it wants the industry to change its practices straight away. There is no excuse for delay, and hopefully those in the industry who make more from selling open-ended, rather than closed-ended funds, will not seek to slow the change that now needs to happen.
As the memorandum laid before Parliament makes clear: “the single aggregated figure that is being produced under current EU-inherited rules is not an accurate representation of the actual cost of investment in shares in an investment trust”.
Baroness Sharon Bowles and a brilliant group of experts have worked tirelessly on this issue and it has been an honour to work with them. They deserve the highest praise for working so patiently with industry leaders, lawyers and the London Stock Exchange to remedy this regulatory failure. The aim was always to ensure consumers are properly informed instead of being misled. We have all persisted with the battle to represent consumers properly and tell them clearly how the costs of managing and administering the investments are met.
Closed-ended investment company expenses are not paid directly by shareholders, they are part of corporate expenses. These companies pay the portfolio management expenses as a corporate cost, not as direct consumer charges. While investment trusts themselves cover the costs of these expenses directly, the shareholders buy or sell their shares at a price determined by the market, which of course factors in all the relevant corporate expenses.
Finally, it seems the FCA will clarify the difference between open- and closed-ended investment companies charges. Open-ended unit trusts or UCITS funds do pass on the management charges and other administrative costs directly to unit holders, but the listed closed-ended investment companies such as investment trusts and REITs do not. Correct cost disclosure should mean that at last these closed-ended investment trusts can be considered for pension fund portfolios. They are ideal vehicles for holding long term illiquid investments without the risks and pressure from forced disposals or gating which can impact open-ended investment portfolios.
