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Making sense of investment trust charges

Making sense of investment trust charges
January 7, 2021
Making sense of investment trust charges

None of these numbers is wrong, but they highlight the confusing way fund fees are presented, which appears to come down to a regulatory discrepancy, and the many costs involved. So, why the different charges, and what does each represent? Let’s take the two ‘ongoing charge’ fees first. 

Investment trusts and many open-ended funds fall under different regulations, with the former following the Packaged Retail and Insurance-based Investment Products (Priips) disclosure requirements, and the latter those of the Undertakings for the Collective Investment in Transferable Securities (Ucits) directive.

The costs that should be included in a fund’s ‘ongoing charge’ under the two regulations currently differ, but are due to be aligned in 2022. Without going into too much detail, funds that fall under Priips, such as investment trusts, have to include transaction and gearing charges (interest paid on borrowed money) in their ongoing charges figure, while Ucits funds do not. 

To create comparable figures for investment trusts with Ucits funds, the Association of Investment Companies has produced a methodology that tries to mirror Ucits rules – shown as the ‘ongoing charges figure’ by Hargreaves Lansdown. The ‘net ongoing charge’, meanwhile, shows the costs as calculated by Priips requirements, which is why the figure is higher. 

More broadly, ongoing charges are designed to represent the fund’s drag on performance caused by the regular, recurring cost of running the fund. Specifically, the AIC says its ongoing charges figure represents “the annual percentage reduction in shareholder returns as a result of recurring operational expenses, assuming markets remain static and the portfolio is not traded”. 

A number of costs can be excluded from both of these figures, such as performance fees, if applied by the manager, or charges on carried interest. You also have to pay stamp duty of 0.5 per cent when you buy an investment trust. And you have to pay most investment platforms a management and dealing fee, too. 

Hargreaves Lansdown’s average annual charge helpfully illustrates the total amount you might expect to pay in fees over a five-year period – including all platform, fund management and transaction charges, tax and other charges.

While the discrepancy between the ongoing charges is confusing, Hargreaves Lansdown says it is planning to align both figures with the regulatory requirements, to make matters simpler. This is the approach taken by interactive investor and AJ Bell, which both state Oakley Capital’s ongoing charges figure as 3.29 per cent.

If you want to compare the cost of an investment trust with a Ucits fund, however, it seems best to look at the AIC’s charge. Fortunately, all performance figures shown are based on the share price, which will already reflect the investment trust’s charges.