Investment Trusts can be subject to a range of costs and charges relating to their management and administration. An understanding of these charges is vital for all investors so that informed judgements about the potential profitability of an investment can be made and so that all investment strategies can be effectively planned in accordance with personal circumstances and objectives. This article aims to aid in the education of both the novice investor and students of financial practices by examining these costs and evaluating their influence upon overall investment success.
Investment Trust charges can include:
While Investment Trusts don’t have an initial charge, you will have to pay a dealing charge. The dealing charge is the same as buying a share and relates to the cost of buying and selling the shares, including the brokers commission, stamp duty and VAT.
There may also be a difference between the buying and selling price of the shares called a ‘bid-offer spread’. This is created by stock market brokers and not the trust itself. While the spread is usually small (2% or less) in the normal course of events, it can widen significantly if a trust is especially popular or unpopular.
This fee is in effect a transactional charge. If an individual wishes to switch between funds rather than make a new investment, then they will be subject to a switching fee, often 0.25%, instead of paying an additional initial charge.
This fee will also apply if an individual wishes to move money from an ISA Cash Park into a fund. If any initial commission is due to be paid to an investment adviser then this will be deducted from their investment in addition to the switching fee.
Example charge: Approximately 0.25% dependent upon the specific trust.
This charge relates to the cost of cashing in shares within an investment trust if an investor wants to cease their investment activity. In this instance the exit charge becomes a dealing charge and will be payable to cover the expense of selling the shares on to a new investor.
Some investment Trusts, such as those managed by Fidelity for example, do not apply exit charges to any of their investment trusts.
AMC (annual management charge)
This is an on-going charge that relates to the management and administration of the investment trust throughout a given year. It is charged as a percentage of the investor’s holdings which is dependent upon the particular investment trust that has been invested in.
Some investment trusts have a performance fee. A performance fee is an incentive for an investment manager to outperform a benchmark index. It is charged as a percentage of performance achieved above a defined hurdle rate, over a set performance period.
For example, the performance fee for Fidelity China Special Situations is payable if the net asset value of the fund outperforms its benchmark index by more than 2% over a performance period.
These charges can include costs such as:
- Custody and professional services fees
- Costs related to the production of an Annual Investment Report
- Secretarial fees and performance fees where applicable.
Stamp Duty: Stamp Duty of 0.5% is payable on all investments held outside of an ISA.
Performance Fees: A performance fee is an incentive for an investment manager, like Fidelity, to outperform a benchmark index. If the benchmark is surpassed then the provider can claim a fee based upon achieving this success. The rate of this fee will differ and should be closely considered by investors prior to investing in a trust.
Total Expense Ratio (TER)
In order for investors to make an informed judgement about the profitability potential of investment trust a Total Expense Ratio (TER) can be calculated.
The TER aggregates the annual management charge plus all of the additional expenses of the investment trust in question. This total cost figure is then divided by the total assets of the investment trust to arrive at a percentage amounts which is the Total Expense Ratio.
Therefore the Total Expense Ratio can be viewed as:
Total Fund Costs / Total Fund Assets = Total Expense Ratio