Finsbury Growth & Income introduces tiered fee

At present, Frostrow Capital, which handles the trust's administration and marketing, receives a set fee of £70,000 a year plus 0.15 per cent of the value of its adjusted market capitalisation. The trust's portfolio manager, Lindsell Train, receives a fee of 0.45 per cent of the value of its adjusted market cap a year.

The adjusted market cap is the monthly average of the trust's market cap, taking into account the shares that are floating on the stock market.

However, from 1 October after when Finsbury Growth & Income's adjusted market cap reaches £1bn, Frostrow's fee will be 0.15 per cent of adjusted market cap a year up to £1bn, and 0.135 per cent of adjusted market cap of the amount over £1bn. Even if the trust's market cap falls back below £1bn, Frostrow will no longer receive the £70,000 fee.

Lindsell Train's annual fee will be 0.45 per cent of adjusted market cap up to a value of £1bn, and 0.405 per cent of the amount over that level.

Frostrow says the trust is always looking at ways to reduce fixed costs so that it can lower its ongoing charge. "As the fund gets bigger investors will be able to enjoy economies of scale," says Alastair Smith, managing partner at Frostrow. "As a fund grows, the absolute amount of the fee to the managers grows, so doing this benefits shareholders."

Finsbury Growth & Income had a market cap of £932m as at 17 October. "There will not be an immediate impact from the fee changes," says Ewan Lovett-Turner, director, investment companies research at Numis Securities. "However, Finsbury Growth & Income is trading on a premium to net asset value (NAV) and regularly issues shares to meet investor demand, more than doubling its share capital over the past four years. The fund protects a 5 per cent discount, but has not bought back shares since 2010."

This is because the trust largely trades at around par, usually at a slight premium.

The trust's most recent ongoing charges figure is 0.78 per cent, but Mr Lovett-Turner says this should start to fall if the market cap exceeds £1bn. It already has one of the lower ongoing charges among UK Equity Income sector investment trusts.

The open-ended fund run by the same managers, CF Lindsell Train UK Equity (GB00B18B9X76), has an ongoing charge of between 0.55 and 0.75 per cent depending which platform you buy it from.

Both the investment trust and the fund have strong performance records.

A number of other investment trusts have adopted a tiered fee structure. These include Baillie Gifford Shin Nippon (BGS) and Baillie Gifford Japan Trust (BGFD), which added a third tier with effect from 1 September 2016. These trusts' annual management fees had been calculated at 0.95 per cent on the first £50m of net assets and 0.65 per cent on the remainder, but are now 0.95 per cent on the first £50m of net assets, 0.65 per cent on the next £200m and 0.55 per cent on the remainder.

Baillie Gifford Japan and Baillie Gifford Shin Nippon have net assets of £467.7m and £236.2m, respectively, and ongoing charges of 0.91 per cent and 1.02 per cent.

Baillie Gifford Japan's board said the tier was added "in recognition of increasing value for shareholders and improving the attractiveness of our investment trust management fee structure".

Both these trusts have an open-ended equivalent that charges less: Baillie Gifford Japanese (GB0006011133) with an ongoing charge of 0.68 per cent and Baillie Gifford Japanese Smaller Companies (GB0006014921) with an ongoing charge of 0.63 per cent. We removed the smaller companies investment trust from the IC Top 100 Funds and replaced it with the open-ended version because of the wide differential.

In April, Jupiter UK Growth Investment Trust (JUKG) cut its base management fee from 0.8 per cent of total assets to 0.5 per cent of adjusted net assets, and this will fall to 0.45 per cent for adjusted net assets over £150m and up to £250m, and to 0.4 per cent for adjusted net assets over £250m. It currently has net assets of about £43m and an ongoing charge of 1.13 per cent.

Jupiter UK Growth's board said: "This is intended to ensure that the company's charges are competitive with comparable investment trusts within the UK All Companies sector and also with the institutional unit class of the Jupiter UK Growth Fund (GB00B54CH949)."

The latter can be bought from platforms for an ongoing charge of about 1.02 per cent.

Other examples of trusts with a tiered fee structure include Worldwide Healthcare Trust (WWH), and in the UK Equity Income sector City of London Investment Trust (CTY), Perpetual Income & Growth Investment Trust (PLI), Troy Income & Growth Trust (TIGT) and Murray Income Trust (MUT).

A tiered structure whereby the charge falls as the fund gets larger is generally not used by open-ended funds in the UK.

Source: Morningstar, *Frostrow Capital

Performance

Source: Morningstar as at 14 October 2016

TOP TEN HOLDINGS as at 30 September 2016 (%)

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