Bill to overhaul investment trust cost disclosure rules to be debated in parliament

A private members’ bill tabled by former pensions minister Baroness Altmann, which urged the government to remove investment companies from the Alternative Investment Fund Managers Directive (AIFMD) regulation, was selected in the ballot last week.

Altmann, supported by fellow House of Lords peer Baroness Bowles, have repeatedly called for the removal of the current EU cost disclosure rules, known as PRIIPS, which have caused investment trust charges to appear artificially expensive.

MiFID II forces firms to disclose total investment cost to clients

If the bill’s passage through the House and Lords and House of Commons is successful, investment companies will no longer be classified as AIFs and their costs will be removed from data feeds.

As a result, costs would be treated the same as any other listed company, although they will remain readily available in KIIDs and factsheets as well as annual and interim reports.

MP John Baron, Bowles and Altmann have written to Nikhil Rathi, CEO of the Financial Conduct Authority, and Andrew Griffith, economic secretary to the Treasury, calling for these “misleading” cost disclosures to be removed. 

Controversial ‘double counting’

Investors in investment companies, which trade shares like any other public company, already benefit from transparent reporting, including detailed cost disclosure, they argued. 

Under the current rules, however, institutional investors and intermediaries must report the costs again in their own disclosures to their clients, resulting in “double counting” and an additional layer of complication, which they said leads to a misrepresentation of value.

“As a result of the requirement to double count, many pension, institutional and retail investors have sold their holdings in investment companies rather than reflect higher costs in their reporting,” they said.  

“Those that have not, have suffered huge client withdrawals because they now appear to be artificially expensive thanks to the duplication of reported costs.”

Shareholder activism and M&A surge is a mixed blessing for investment trust sector

This double counting, which they said is “killing” the sector, has led to significant sell-offs by investors unwilling to reflect higher costs in their reporting, causing share prices to collapse and stifling new issuance, they argued. 

Altmann, Bowles and Baron said that in the last 18 months, the supply of capital has “almost completely” stopped for investment trusts, adding that the situation for the sector is “worse” than it was in the wake of the Global Financial Crisis in 2008.

The average discount across all investment trust sectors stood at 16.9% at the end of October, the widest discount for a month-end since December 2008, when it reached 17.7%, according to data from Morningstar.