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The UK government has exempted investment trusts from onerous cost disclosures in a move analysts believe will boost the £260bn industry and could support trusts’ share prices.
In a joint statement this week, the government and Financial Conduct Authority said investment trusts will be excluded from European regulation that affects how their charges are reported.
The rules on packaged retail and insurance-based investment products, or Priips, meant that investment trusts appeared more expensive than other types of financial product.
This is because institutions such as wealth managers and private banks would have to include the cost of investment trusts in their “ongoing charges figure” for clients, while shares and other types of investments were excluded from the fee.
Investment trusts were brought into the Priips regulation a decade ago. But this has deterred institutions from buying them due to having to report artificially higher costs, analysts said.
This reduction in demand is one of the factors that has weighed on trusts’ share prices. When their share price is worth less than the value of the trust’s assets, they are said to be trading at a discount.
Analysts at Winterflood said this “unfair playing field” meant there was “an administrative block to demand for funds in the sector which were deemed ‘too expensive’ based on such disclosures”.
Alan Brierley, analyst at Investec, said “an ill-fitting regulatory framework regarding cost disclosures has created significant headwinds for the closed-end industry in recent years and, when combined with the most challenging of macro environments, this has created a perfect storm”.
Richard Stone, chief executive of the Association of Investment Companies, said “ending misleading cost disclosures will enable us to continue delivering for investors and make a critical contribution to the economy as the government drives forward its ambitions for growth, investment and wealth creation”.
The move could attract more money into investment trusts, which should in turn provide a boost to the UK’s capital markets. Investment trusts represent more than 30 per cent of the FTSE 250.
Christian Pittard, head of closed-end funds at Abrdn, pointed to the role of investment trusts in supporting parts of the economy.
He said trusts have “a 150-year-plus track record of channelling capital into productive areas such as high-growth companies, infrastructure, greener energy and housing”.
Trusts investing in higher-cost alternative assets were hit harder because of the rules.
“Onerous, misleading and inconsistent disclosure requirements have had a material impact on the sector, particularly within alternative asset classes such as listed private equity, where discounts have widened materially,” said analysts at Deutsche Numis.
Analysts at Stifel said: “It is a relief to see that after a long period of lobbying, the UK retail disclosure rules will be reformed and investment trusts will at least temporarily be exempt from the current cost disclosure rules.”
The FCA will now consult on new rules to replace Priips, which are expected to be in place by the middle of 2025.
The new framework for Consumer Composite Investments will be aimed at helping “investors to better understand what they are paying for and the value they are receiving through the distribution chain”, the government said.
https://www.ft.com/content/a27ec4cd-9b83-47c6-a351-0413cac7e35d
