Charging costs to income comes at a price

Earlier this week I wrote an article (which you can read here) about the increasingly common practice of fund managers charging their costs to income rather than capital – with the result that part of what most investors think is income is in fact the return of some of their own capital. Not long after that was published I received a note from JP Morgan Cazenove which backs up the points I made nicely.

The paper used the example of an investment trust with £100m-worth of assets and looked at how the yield on it can be changed for the better or worse by careful use of gearing and the charging of costs to capital.

There are a variety of complicated, worked examples in the piece and anyone who is interested in the subject can contact me at for more details on them. But the conclusion is pretty straightforward.

It is that “managers of investment trusts have many levers to pull to generate higher dividends given a set portfolio yield” and that this can be a useful way of attracting investors in times such as this.

However, “there is no free lunch”. There is a “direct trade off between the amount charged to capital and the impact on capital returns”. Charge your costs to capital and you will pay the price in forgone capital gains.