UK investment companies have historically been a world-beating success story, offering an excellent way for investors to back sustainable British growth.
But this once thriving sector, with over 350 companies quoted on London stock markets and assets exceeding £250bn, is in crisis.
Continuous selling pressure has created massive share price discounts to net asset value and new funding has dried up.
Several factors are responsible, including recession fears, geopolitical risks and surging interest rates that reduce the attraction of equities. But why have UK investment companies been hit especially hard, despite similar factors at play elsewhere in the world?
It is galling to see new EU-derived cost disclosure rules, not applied in the EU or any other country, undermine a once thriving UK financial sector
Well, a spectacular regulatory own goal has uniquely exaggerated the reported costs of owning UK investment companies, driving those seeking exposure to sustainable investments such as alternative energy, infrastructure and fast-growing tech companies into overseas funds instead.
Ironically, regulatory emphasis on helping investors make properly informed decisions about total charges they pay to own funds have left UK investment companies looking too expensive, with comparable non-UK and other similar listed individual companies looking much more attractive.
The problem stems from European Union (EU) measures to improve consumer protection for investors in alternative investment funds (AIFs) after the global financial crisis. The 2013 AIF Managers Directive (AIFMD) aimed to improve charges disclosure of notoriously high-cost alternative investments such as private equity and hedge funds.
The flawed charges regime worsened last year with increased FCA emphasis on value for money
Unfortunately, UK financial regulators erroneously lumped our investment companies in that same basket, labelling them as AIFs, even though these quoted investment companies were already subject to strict London Stock Exchange reporting rules required by the listing authorities.
It is really galling to see new EU-derived cost disclosure rules, not applied in the EU or any other country, have undermined a once thriving UK financial sector.
Subsequent EU regulations for AIFs – including Priips and Mifid II – have resulted in UK investment companies having to report all so-called underlying charges, including management fees, administration and legal costs, as ‘ongoing charges’.
Retail investment platforms have even excluded such companies, mistakenly labelling them as high cost
No other country applies this approach to its listed investment companies, because those costs are just part of the market share price, not ongoing charges deducted from investor assets.
This flawed charges regime worsened last year with increased Financial Conduct Authority emphasis on value for money and Consumer Duty. Wealth managers, unit trusts or Oeics have been told to add charges of UK investment companies to their own fees, as if the investor pays all those costs, which is a nonsense.
Holding listed investment trusts helps improve diversification or capture specialist sector exposures but exaggerates reported charges, whereas holding ordinary shares (and, indeed, non-UK investment companies) adds no more to the reported ongoing charge.
If it galvanises government and FCA into action, it might help restore a critical part of the UK’s financial ecosystem
Institutional and pension investors have thus steered clear of or sold UK investment companies, rather than report misleading higher costs to clients. Retail investment platforms have even excluded such companies, mistakenly labelling them as high cost.
This all makes no sense. It mixes up open-ended and listed closed-ended funds. The latter do not deduct management and other fees from the investor’s assets. Once listed, costs are just reflected in the market share price.
It has become increasingly clear these misleading charges are undermining the UK investment company sector, draining the economy of growth capital, driving investors to use overseas investment companies or UK funds which ignore the new rules and undermining specialist investment opportunities as well as confidence in UK financial markets.
This once thriving sector, with over 350 companies quoted on London stock markets and assets exceeding £250bn, is in crisis
Working with Baroness Sharon Bowles and other industry experts, I am introducing a Private Members Bill in the Lords, to try to restore a level playing field for UK investment companies and stop this misleading charge disclosure.
This is not a quick fix but if it galvanises government and FCA into action, it might help restore a critical part of the UK’s financial ecosystem.
Ros Altmann is a former pensions minister
The tendency of the UK Civil Service to regard every EU initiative as carte blanche to destroy UK business and place it at disadvantage with continental competitors is partly what drove me and others to support Brexit. UK officials can ALWAYS be trusted to betray UK business and industrial interests – whether naively or deliberately. The UK has an institutional bias against business and commerce – especially in public institutions – with officials doing all they can to hobble UK business. Our politicians are little better either – only ever interested in bestowing rights, never responsibilities.
Another illustration of how the brexiteers misunderstood almost everything about Europe. Read the article carefully, you will see that is has been our inept regulator that is responsible for this cock up. It doesn’t apply to this type of fund in Europe.
Wonderful! First the regulator decimates the advice sector through inept regulation, through its ill thought through actions makes access to advice for modest saver almost impossible & now destroying the Investment Trust sector as well. Will no one rid us of this meddlesome regulator.
This is great work by Baroness Ros Altman and Baroness Sharon Bowles. The most galling issue is that EU countries have not used this to the same extent! The FS regulation space desperately needs JOINED-UP thinking as one change somewhere always has other consequences. It is about time we started to look after the FS industry which creates many jobs and has the potential to create many more!! The last few years have been a nightmare for regulatory changes!!
Anything which drives the FCA into action is a must see/experience…
RA describes a scenario where the good ‘ol plucky British folk are hamstrung by Byzantine EU rules – further, no doubt, driven by their lickspittles the OECD – whilst this may have some veracity, I would like other factors (too) to kick the FCA, and their FoD masters into action…
The UK has largely wasted any potential benefits of a lighter touch regime under Brexit, UK is now considered much of a political risk given the chaos of last few years, continuity of policy is also something which has eluded UK Govt….
The financial industry itself, however, is mostly to blame… we are constantly reminded of the complete lack of regard towards, or awareness of, the wishes of investors and distribution… viz…
High charges and exit fees, closing funds to protect other investors (???) actually continuity of income for fund, keeping the vast majority of charges to closed funds, opaque reasoning when things go awry – Woodford E.g., no availability of dealing charges paid by funds, dark pooling which hides and distorts real value, internal ‘boxing’ of unit price disparity…
As to investor costs.. they now pay fees directly to distribution for advice – non? So what has happened to all the commissions now not paid?
The fact is that UK has been losing self investment amongst fund managers for last 20 years – down from aproximately 40% to around 5% today – conversely, overall charges to investors have increased…
Lastly, £GBP has been in steady decline for last 20 years too… Evenly performing funds in $USD, and especially CHF, would have returned about 70% more due to currency movements…
A simple example is to look at the benefit packages of the senior staff at UK investment co.s… DB abounds, plus just about any other expensive benefit you can think of…
For you Tommy… ze charging party is over…