Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
UK-listed investment trusts are under pressure to change how they calculate their management fees, which could reduce them significantly.
A decision in December by Greencoat UK Wind, the largest renewable energy infrastructure trust, to alter its formula to the lower of market capitalisation or net asset value could spread throughout the UK’s other 294 listed trusts.
This change could depress management fee revenues by 30 per cent — roughly £53mn, in the renewable energy infrastructure sector alone.
The news follows two years where investment trust share prices have trailed their net asset values per share, leading to shareholder unrest. By the end of November the discount had reached an average of 15 per cent, not far from the largest amount seen since the global financial crisis. Excluding venture capital vehicles, these trusts hold £265bn of assets, according to the Association of Investment Companies.
In particular, trusts which invest in renewable energy and other infrastructure have slid to deep discounts as investors question the stated valuations of their unlisted portfolios. UK Wind’s negative spread had widened to about 20 per cent.
Just over 3 per cent of the 294 listed investment trusts currently use the lower of market capitalisation or NAV formula, say the AIC. Over two-thirds use NAV as a basis for management fees.
Some asset managers have long campaigned for changes on fees. “The UK Wind thing is a big deal,” said Ben Conway, chief investment officer at Hawksmoor Investment Management, one of the vocal critics on this subject. “Everyone is talking about this. It’s about alignment with shareholders.”
“We think this is a very positive development as it creates greater alignment between the company, investment manager and shareholders and results in a meaningful saving to investors,” wrote Ben Newell, an analyst at Investec.
The UK Wind decision was taken after consultations with shareholders and will have a significant impact for the investment manager, Schroder Greencoat. Management fees for UK Wind should fall by £5.5mn to £25.7mn according to an estimate by analysts at Investec. The change took effect from January 1. Schroders took control of Greencoat Capital by acquiring 75 per cent of the renewable infrastructure fund for £358mn in December 2021.
UK Wind’s board decided to move first in the renewables sector, according to one person close to the board. This person believes that other managers will make similar changes in the coming year. With a market value of £2.9bn, the trust is the largest among its peers.
This could cause financial stress for smaller trusts. “In some situations, where an investment company has a small market cap, such a fee basis may make the company unviable to run,” said Iain Scouller an analyst at Stifel.
“It’s important for the entire investment trust arena,” said Conway. “You can’t have a situation where the NAV is up and shareholders are seeing negative returns on the share price.”
Cordiant Digital, which invests in communications infrastructure, such as data centres, took an early decision to use a fee formula based on market capitalisation. Cordiant Capital “viewed this as the right thing to do”, said Benn Mikula, its chief executive officer, when the fund launched in February 2021.
“This [change on management fees] is an understandable reaction to the gap between share prices and NAV. But why are there discounts in the first place? This remains a safety-first market which idolises fixed income.”
Another sector within investment trusts which may see similar changes is real estate, known as REITs. In November, Supermarket Income Reit announced that it will shift its formula solely to one based on market capitalisation from July 2025. There are 30 traded REITs with assets of nearly £21bn.
The investment manager, Atrato Group, wanted to move to a market capitalisation fee basis at the trust’s listing in 2017, but larger shareholders argued for the NAV formula. “Then, they did not want the fund to go against convention,” said Ben Green, co-founder of Atrato.
Atrato has been appointed to manage another trust, Social Housing Reit. It is widely expected to use the market capitalisation formula for management fees as well. Green expects more investment trusts to shift to this fee method if discounts persist. “For alternatives it will be a bigger problem than for publicly listed company portfolios, he said. “Smaller ones will suffer.”
Read the full article here