The Chancellor, in his Autumn Statement, asked the FCA to take action to remedy the problem of misapplied charges disclosure regulations which force investors to sell UK-listed investment trusts, driving pension funds to buy overseas investment companies instead. Since then, however, nothing has changed and the exodus of capital from the investment companies sector has accelerated. This selling pressure and loss of investor support is based on a false premise, created by regulations that were meant to protect consumers but actually do the opposite.
UK investment trusts are being starved of capital as regulations require them to misrepresent investor costs. UK investment trusts are a long-standing British success story. For over 150 years, they have offered access to ready-made portfolios which most investors could not put together or manage themselves. The closed-ended investment structure is ideally suited to long-term institutional investment in illiquid assets, and offers exposure to a wide range of environmental and social investments. But the sector has been undermined in recent years by charges disclosure rules that have been misapplied to investment trusts, forcing these companies to show misleading information to investors, and to exaggerate the costs of holding their shares. This has culminated in waves of selling, lack of buyers, unwarranted large discounts to net asset value and share price weakness that has stopped capital raising for vital growth sectors as UK investment companies suffer an exodus of capital from institutions and wealth managers.
Emergency intervention could help protect this important sector, which makes up over 30 per cent of FTSE250 and supports vital economic growth areas. This will also boost UK financial markets as a whole, since investment companies make up well over 30 per cent of the FTSE250 and, therefore, UK indices have been dragged down along with the investment trusts themselves.
Regulations derived from the EU have been imposed uniquely on UK-listed investment trusts, driving investors to sell on a false premise: The market dislocation in investment trusts is being driven in large measure by a unique application of retained EU law which differs from the way the same law is applied in every EU member state. The perverse British interpretation of EU regulations has made UK-listed investment companies appear misleadingly expensive, driving an exodus of capital as retail investor platforms have removed these companies from their platforms on a false premise.
Wealth managers, funds of funds and pension investors are being obliged by UK Regulators to report operating expenses, that are of course properly reported in financial statements, to investors as though they were part of their own fund management fees. They are required to double count the cost of investing. And rather than do that they simply sell the shares. The consequent flight of capital is a disaster for the very assets the government wants the private sector and pension funds to support. No other stock exchange in the world obliges shareholders in any listed company to report the costs of a listed investee company as though they were part of their own fund management charges.
Unwarranted discounts to net asset value have opened up, as investors are switching overseas, where the UK disclosure rules do not apply. Funding for UK-listed investment trusts has dried up, depriving the economy of an important source of growth capital for the very areas which Government would like pension funds and other investors to support.
Investors are switching out of UK markets needlessly, depriving consumers of dependable dividend paying investments, and denying them access to ready-made portfolios which could add diversification and improve risk-adjusted long-term returns. Ironically, the rules were imposed in the name of consumer protection, yet they have achieved the exact opposite. Ending these flawed consumer cost disclosures, will help properly informed consumers make better decisions and bring back stability to the precious investment trust sector and harness the power of UK pensions.
Only UK investment companies have figures shown as ‘ongoing charges’, making them uniquely unattractive for investors when compared with all global competitors. Most investment trusts invest in real assets, including vital infrastructure projects such as schools, motorways, affordable housing, police and fire stations, and NHS hospitals in the UK, which can deliver strong long-term income, offering good dividend yields over time.