Investment trusts have played a key role in the UK economy since Victorian times.
During Queen Victoria’s reign, they were used to raise money to build railways and other engineering projects.
In the years that have followed, these closed-ended funds have become an increasingly popular tool for investors.
In 2021 alone, a record-breaking £15.1bn of new money was poured into these trusts, according to the Association of Investment Companies (AIC).
They are seen as particularly attractive for clients with large investment portfolios who want help accessing asset classes beyond the mainstream options.
However, there is an ongoing issue that is preventing an estimated £7bn a year more being invested – disclosures that “double count” costs.
This rule, inherited by the European Union (EU), makes it appear that investment trusts are more costly to invest in than they actually are.
The disclosure rule requires trusts to publish the costs of financing, operating and maintaining real assets.
However, many of these costs are already published in regular company updates and reflected in the value of the share price for all investment companies.
Abrdn head of closed end funds and managing director, corporate finance, Christian Pittard says that this “double counting of costs” is putting investors off.
Meanwhile, AIC chief executive Richard Stone claims the “misleading” cost disclosure regime is an “unnecessary hindrance to investment trusts”.
Stone says the challenge for advisers is how to explain to their clients that the investment trust does not cost as much as it appears to on paper.
“The current rules paint a misleading and confusing picture of the true cost of investing in an investment trust with disclosures that double-count costs,” he says.
“Investors cannot accurately compare investment trusts with other shares or collective investment vehicles.”
It was widely hoped that one advantage of the UK leaving the EU in 2016 would be an end to the double publication of these costs to investors.
However, for the past eight years it is a rule that has remained in place – something Stone describes as “very frustrating”.
He adds that reform is a “no brainer”.
Pittard explains that the ongoing cost-of-living crisis, averting a recession and a change in government has seen the double-cost dilemma fall down the list of priorities.
So, what is being done about it?
Abrdn is currently running a campaign to resolve this issue, saying it believes a fair cost disclosure regime for investment trusts would “benefit consumers and the industry”.
Pittard believes it is “crucial in solving many of our problems, from boosting capital markets to getting investment flowing into productive areas, like infrastructure, energy and housing”.
Another change on the cards in legislation is the Alternative Investment Funds Directive (AIFMD).
The private member’s bill was first introduced by Baroness Ros Altmann on 22 November 2023 in the House of Lords.
The Bill was set to amend the issue surrounding investment trusts cost disclosures and it passed through three readings in the House of Lords.
However, the announcement of the July 2024 General Election derailed the progress of the Bill, which was due to be read in the House of Commons.
But post-election, it seems to be back on the agenda as it was finally introduced to Parliament last week (5 September).
Pittard says: “We very much hope the new government will pick up this Bill, which is vitally important to the future of investment trusts.”
The new Bill has been proposed by Baroness Sharon Bowles.
“We greatly appreciate the hard work of Baroness Bowles on this Bill and Baroness Altmann, who introduced the first cost disclosure bill,” says Pittard.
“The Bills have successfully helped to raise the profile of the investment trust cost disclosure issue and have gained cross-party support.”
Stone adds that the AIC is also lobbying the new Labour government “to ensure this issue is swiftly resolved”.
The organisation has also met with the Treasury and written to the economic secretary to the Treasury and city minister Tulip Siddiq.
“It’s been encouraging to see the industry pulling together to explain to the government and regulators how damaging the current cost disclosure regime is,” Stone adds.
Stone concludes: “The AIC is calling for investment trusts to be excluded from the scope of regulated cost disclosure altogether.
“This result can be achieved if the Treasury takes steps to exclude the sector from the rules designed to replace PRIIPs and MiFID II.
“None of our recommendations would damage transparency because the costs and expenses would still be published in the annual report.”
Now the dust has settled following the election and the issue is back on the agenda, now is the time to finally amend the disclosure rules that are holding the sector back. It is vital for Labour’s plan to unlock investment in the UK.
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