Gravis’ William Macleod sheds some light on what lies behind the recent investor confusion resulting from Guidance issued by the Investment Association back in June.
On 30th June 2022, Guidance on Cost Disclosure for Investment Companies, Listed in the UK took effect. The IA’s Guidance is simple and requires investors in closed-ended investment companies to disclose fund charges for their holdings in UK Investment companies.
The intention was to bring cost disclosure for these companies into line with MiFID II regulations, but the effect has been to cause confusion and unwarranted complexity because these same charges have already been factored into the valuations of these companies. Investment companies are priced and valued in a unique way, quite unlike oden ended investment companies (OEICs) or funds, and the disclosure of costs in this way is in effect double counting.
A world beating IC sector
The UK has the largest number of investment companies of any market worldwide with nearly 400 Investment Trusts, Investment Companies and Real Estate Investment Trusts (REITs) (collectively known as ICs). They offer investors liquidity by issuing shares on the London Stock Exchange and can invest in asset classes such as equities (Investment Trusts) or illiquid assets such as property (REITs) or infrastructure or renewables (Investment Companies). ICs have been around for over 150 years and recently have been pivotal to the UK’s drive for Net Zero, raising and investing £34bn in the last few years.
A ‘firm’ recommendation and not law
The IA’s Guidance is a ‘firm’ recommendation and not law; the decision to publish these costs has been left to Authorised Corporate Directors (ACD) of which the external ACDs have added the costs to their EMT files, giving the impression of elevated costs, and internal ACDs have largely decided not to follow the Guidance, including one firm which U-turned on learning that investors would not understand and were likely to be unhappy with the increased, albeit synthetic, cost.
Additionally, the Guidance only applies to UK listed closed ended investment companies listed under Chapter 15 of the Listing Rules. A good illustration is the treatment of four property companies which own big storage and logistics sheds: Tritax Big Box plc (UK listed REIT), Eastgroup (US listed REIT), Mapletree Logistics (Singapore listed REIT), and Big Yellow Group plc (UK listed property company). Of these four, only the cost of Tritax Big Box is disclosable to investors, the other three, despite operating near identical business models, are essentially free to own.
Each IC calculates a Net Asset Value (NAV) after all costs have been taken into account, leaving the share price free to move above (premium) or below (discount) the NAV depending upon demand for the shares. Investors can decide whether they’d like to invest directly in these shares or in one of the UCITS Funds which do so on their behalf. The point is that the cost of managing an IC has already been included in the NAV and so to disclose it a second time is double counting. The UK has the largest number of listed IC companies but is the only country in the world to have Guidance of this nature.
So why are we in this position? It has to do with PRIIPs and the UK’s final and probably quite weary negotiations to leave Europe. As Brexit negotiations were coming to an end, PRIIPs legislation relating to costs and charges was left in place, and the FCA extended the UCITS exemption to the UK’s PRIIPs regulation until 2026. This caused confusion amongst fund managers and investors, many of whom interpreted the extension as a delay to implementing the cost disclosure for ICs. In the meantime, the IA issued the Guidance anyway, with the encouragement of the FCA. To add to the confusion, the lA responded to the HM Treasury’s PRIIPs consultation in the Spring 2023 requesting the removal of the Guidance in the forthcoming PRIIPs review.
Is there light at the end of this unsatisfactory tunnel?
Confused? You are right to be, but rest assured, there are many, most notably Baroness Bowles of Berkhamsted, who are not and are putting up a meaningful fight urging common sense to prevail. Bowles is well placed to lead this battle, having chaired the European Parliament’s committee on economic and monetary affairs between 2009 and 2014 and now sits in the House of Lords. She has taken on this miscarriage of common sense to the top of the FCA and HM Treasury aiming to overturn the Guidance through political channels while we await the outcome of the FCA’s PRIIPs review.
Until then investment by the sector has hit the brakes while the UK continues to fret about missed climate change targets.
About William Macleod
William is Managing Director – Commercial at Gravis and is also the founder of Gravis Advisory Ltd, which advises the 4 open ended Gravis funds: the VT Gravis UK Infrastructure Income Fund, the VT Gravis Clean Energy Income Fund, the VT Gravis UK Listed Property (PAIF) Fund and the VT Gravis Digital Infrastructure Income Fund.
William began his career in financial services in Edinburgh before moving to the Financial Times where he spent 9 years, ultimately as Head of Companies and Markets before going on to conceive and launch Ftfm. In 2005, he joined Fidelity and in 2009, he founded Highland Capital Partners and began working with Gravis, before joining the company 2016.
William has the Investment Management Certificate and Chartered Insurance Institute Level 3 in Financial Planning.