After Priips changes, investment trusts are due a rerating

On 19 September 2024, the government and the Financial Conduct Authority, the City regulator, jointly declared that investment trusts would be excluded from European regulations affecting how their charges are reported. This move has been a long time coming. Campaigners have been arguing for years that the rules are being applied incorrectly and, as a result, are doing untold harm to the investment trust sector. 

The regulations, known as Priips, had two major drawbacks. They forced investment companies to add corporate costs on top of their management charges in a reported “ongoing charge fee” as if they were paid directly by the shareholder. This in turn pushed up the figure investment managers had to report to clients when it came to the expense of managing their portfolios. 

Priips were designed to clarify the cost of investing in funds for investors, illustrating the cost of fund management upfront on the key information document (KID), something funds were reluctant to do themselves. However, the rules effectively forced trusts to double-count the costs of management – hardly helpful, and not a good look when they have to compete against low-cost passive trackers.

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The problem was most apparent in the alternative investment trusts sector. As closed-ended vehicles, investment trusts are perfectly designed for investing in illiquid assets. Still, the cost of managing these assets will always be higher than the cost of buying and selling securities. In some sectors, such as the real estate investment trust (REIT) market, there was even inconsistency between how companies interpreted the rules. 

Analysts at corporate broker Deutsche Numis have called the Priips requirements “onerous, misleading and inconsistent”, and say they have had a “material impact on the sector”, notably in alternative asset classes such as listed private equity where “discounts have widened materially”. Following the changes, trusts can ignore the rules that have forced them to publish misleading KIDs, and investment managers can also overlook the requirement to report an aggregated cost of all investment trusts owned. The FCA and the government have committed to bringing in new rules in the first half of 2025. 

Deutsche Numis has described the current rules as a “meaningful headwind for the sector”, owing to “artificially high KID costs”. However, following the changes, these investment companies could end up “back on the radar of these investors”, which could have a “meaningful impact on the sector over the short to mid-term”. 

The trusts most likely to see an impact are those with the highest and most inflated KID figures. The private equity sector is the prime example. Oakley Capital Investments, for instance, has one of the highest reported cost ratios in the sector at 7.25%. These trusts are trading at large discounts to net asset value, and the removal of the Priips regime could be the first step in a rerating process.

Likely investment trust winners from the rule changes

The AVI Global Trust and MIGO Opportunities Trust are two alternative ways to play the trend. Asset Value Investors manage both. 

AVI aims to achieve capital growth by acquiring undervalued assets, including investment trusts.
MIGO is more of an investment-trust specialist, although, at roughly a tenth of the size of AVI, the shares may not be suitable for all investors. Both trusts count Oakley as one of their top holdings, with 6.7% of AVI’s portfolio allocated to the private equity trust. Other top-ten holdings in the £1.3bn trust include News Corp, Japanese group Softbank and Cordiant Digital Infrastructure, another trust.
Cordiant Digital, a trust specialising in the infrastructure of the digital economy, is another example of the distorting impact of the Priips regime. Its KID has annual costs pegged at 2.03%, while the Association of Investment Companies has the figure at 0.9%. It could be another major beneficiary of the reforms.

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