In my editor’s letter this week (out tomorrow for subscribers) I’ve suggested a few of my favourite investment trusts, with a view to creating a model portfolio for readers over the next few weeks.
There are a good many reasons why I prefer investment trusts over unit trusts (cost, performance, gearing, easier to manage cash flow, etc). But that doesn’t mean that the entire sector is managed by saints with only the interests of the retail investor at heart. Far from it.
A nice little example of unsaintly behaviour popped up in my inbox this morning. Back in March, management of the tiny British Portfolio Trust (it has assets of around £40m) passed to BlackRock. The name has now been changed to the BlackRock Income and Growth Trust.
It makes sense for the trust’s directors to have shifted it to new managers – under its previous managers (Allianz RCM) its performance had been disappointing: over the last year it has fallen just over 6%, while the UK Growth and Income sector as a whole has risen 3.3%. And over the last three years it has risen 48% which, while it sounds OK, has to be measured against a sector rise of 65%. Chronic underperformance such as this pretty much obliges a trust’s directors to move on.
But what doesn’t really make much sense (to my mind at least) is that they have transferred it to BlackRock. First, because as such a small trust it is hard to see how it can’t get lost in the sea of other mandates held by its managers. The two men now charged with running the £40m held by the trust’s shareholders (Nick McLeod-Clarke and Adam Avigdori) now jointly manage “approximately £3.4bn in UK equities”, or so the press release boasts. Yikes.
More than this, however, I wonder how the interests of the shareholders are to be served by the new charging structure Blackrock has put in place.
Under the old management, the fund came with a management fee of 0.5%, plus a performance fee of up to 0.75% of the company’s net assets, depending on performance. So the total was capped 1.25%. That’s high for the investment trust world but below standard for the unit trust world. It is also probably the case, given the trust’s performance, that investors paid just the 0.5% most of the time.
Under the new contract the management fee is 0.6%. You might think that sounds good. And if that was where things ended you would be quite right. But it is not. There is also a performance fee. This is to be set at 15% of the total return outperformance of the company against the FTSE All Share Index on a rolling three year basis. The rolling three year basis bit is OK; the rest I’m not so sure about.
Here, I list all the criteria that would make a performance fee seem reasonable. This one doesn’t meet enough of them. There is no link to the return on cash or inflation, for example (so you could end up paying a fee even if you make a loss). Overall, there’s a lot of ‘win win’ built in here for the manager.
I’d also point out that performance fees are pretty uncommon in this sector (and quite right too). It is also the case that when they do exist, you normally see them limited to a cap of 1% or 1.25% of the fund at most. Blackrock aren’t so shy. Their performance fee is capped at 5% of the fund’s net asset value (and even that can be carried forward).
Many of the managers in the market are – in response to investor demand – moving towards both lower and more transparent fee structures. Not everyone seems to get it.