At last there is relief for UK investment trusts and their investors as FCA issues emergency cost disclosure guidance
Treasury ministers have prevailed to ensure the FCA issues emergency new rules that will properly inform consumers instead of misleading them
The outlook for investors in sustainable long term investments in infrastructure, alternative energy and real estate is now much brighter.
At last Ministers have ensured that the FCA acts with urgency to remedy the misleading information that has so damaged the UK investment trust sector and caused serious losses to investors in successful UK investment companies. See this link.
Long term investors in the once thriving UK listed investment trusts and Real Estate Investment trusts have lost large sums Over the past couple of years, misleading charge disclosures forced many investors to sell their holdings in UK listed investment companies on a false premise of charging extra costs. This led to widespread selling and large discounts that prevented new inflows. The problem has also damaged the UK equity markets as a whole and the wider economy.
These 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 the 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.
Baroness Sharon Bowles and a brilliant group of dedicated industry experts have worked tirelessly and deserve the highest praise: It has been a pleasure to work with Baroness Sharon Bowles and so many industry leaders as well as lawyers and the London Stock Exchange on the case for remedying this regulatory failure. The aim was always to ensure consumers are properly informed instead of being misled. They have all tirelessly persisted with the battle to represent consumers properly and tell them clearly how the costs of managing and administering the investments are met.
House of Lords gave wide cross party support for legislation to remedy this regulatory failure: 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. Baroness Bowles’ new Private Members Bill would remedy this disclosure and also clarify the issue beyond doubt for the future. Her Bill now seems to have helped galvanise a positive outcome for investors. In future they should be properly informed about how investment portfolio management or administration fees are paid and who covers those expenses.
Closed ended investment company expenses are not paid directly by shareholders, they are part of corporate expenses: Closed ended investment companies pay the portfolio management expenses as a corporate cost, not as direct consumer charges. Investment trusts themselves cover the costs of these expenses directly and 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.
Making investment trusts look expensive to hold has led to forced selling by investors who were under pressure to find low cost investments: 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.
Correct cost disclosure will enable investors to use closed ended investment companies again for long term investing in less liquid projects: 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.