A row between a small investment trust and Invesco, the giant asset manager, has “drawn a line in the sand” over high fund charges, say analysts.
Invesco Perpetual Enhanced Income, an investment trust with a £122m market cap, defied £108bn Invesco when it argued last month that the fees it paid were too high.
In an unorthodox move, Invesco resigned as manager of the trust. It subsequently called for IPE chairman Donald Adamson and non-executive director Richard Williams to be replaced. Both men were central to challenging Invesco’s fees.
Mr Adamson said IPE was “a small company facing a self-interested onslaught from a large and powerful group”.
Public acrimony between a trust and its manager would have been unthinkable 10 years ago, analysts said. However, investors have lost patience with complicated charging structures, forcing trusts to resist higher fees, which they have to pass on to investors.
“This is a line in the sand,” said Rob Morgan, pensions and investments analyst at Charles Stanley. “It shows investors getting sick of high fees. The board is realising they have to obtain value for money for investors due to high scrutiny.”
Invesco charges an average management fee of 0.9 per cent, higher than many comparable trust fees, and an extra performance-based fee. According to the trust’s latest results, investors paid 2.15 per cent in ongoing charges for the past financial year. The market average is 1.48 per cent including performance fees, according to the Association of Investment Companies.
Mark Dampier, head of research at Hargreaves Lansdown, one of IPE’s largest shareholders, said the fight was a “sign of the times”.
“Ten years you would not have witnessed this, but investment trusts are being forced to be more assertive.”
Darius McDermott, managing director of Chelsea Financial Services, said trust boards had to be more assertive over fees because open-ended funds were now cheaper. This followed the retail distribution review, which banned trail commissions to financial advisers and reduced fund fees.
“In the past, investment companies were automatically the lower cost vehicles but they have lost their competitive edge,” he said.
The City regulator has also criticised high and uncompetitive charging. “The Financial Conduct Authority has been very clear that fund management groups must demonstrate they’re offering value for money,” said Mr Morgan.
“A greater accountability and need for justification for fees are putting pressure on boards.”
Critics said Invesco was also out of step by charging performance fees. “The base fee [on IPE] was already high without a performance fee,” said Mr Dampier.
Wealth manager Brewin Dolphin, which owns 2.5 per cent of IPE, said this week that Invesco’s charging structure encouraged “high and excessive risk-taking with client funds”.
Performance fees, a cost traditionally associated with hedge funds, allow trusts to charge more when they beat a target. They are designed to motivate managers, but critics argue they are often unjustified.
“We very rarely entertain a fund with performance fees any more,” said Mr Dampier. “No one understands them, they are not transparent and they don’t exist on other funds.
“People always say it aligns a fund manager with a client’s interest but the only thing it lines is the fund manager’s pocket.”
Invesco earns a 20 per cent performance fee on the first £80m of IPE shareholders’ funds and 10 per cent after that when total returns exceed 7 per cent a year. The floor is the Libor interest rate plus 1 per cent.
Over 10 years, IPE has delivered a total return of 95.6 per cent, far more than the 30 per cent average for funds in its sector.
Mr McDermott said: “The performance of IPE has been excellent so you can see why they say their fees are worth it. Cost isn’t everything when it comes to choosing funds.”
Across the fund industry, however, performance-based charging is out of fashion. Since 2008, the number of investment trusts with such fees has fallen from 51 per cent to 36 per cent, says the AIC.
Invesco’s unyielding stance puts it at odds with many high-profile fund houses that have reduced or overhauled their fees.
Last year Fidelity said it would scrap its flat fee and charge investors according to how the fund performed. Under its “fulcrum fee” model, investors will pay a low base fee and a variable performance fee.
Baillie Gifford, which houses top-performing funds such as Scottish Mortgage Investment Trust, last year cut management fees on 20 of its active funds. From April 2017 SMIT paid just 0.3 per cent in management fees to Baillie Gifford on the first £4bn of assets and 0.25 per cent thereafter. The total ongoing charge to investors stands at just 0.37 per cent.
Invesco declined to comment.
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