Multi-asset managers are taking a fresh look at investment trusts now that they are no longer reporting misleadingly high costs.
The price tags attached to investment companies had been artificially inflated for some years until last week, when the Financial Conduct Authority (FCA) intervened, validating an industry-wide campaign to exempt trusts from European Union legislation.
After an investor buys shares in an investment company, they pay no further charges (unlike open-ended funds where costs are subtracted from performance on an ongoing basis). But the way trusts had been obliged to disclose an ongoing charges figure was confusing for investors and made it appear as if costs detracted from share price performance, which they do not, as Gravis managing director William MacLeod told Trustnet.
This also had a knock-on effect on the costs disclosed by multi-asset funds that hold investment trusts, such as the BNY Multi-Asset Income or Multi-Asset Diversified Return funds, managed by Paul Flood.
“The assumptions for calculating costs have now come back a long way, with the FCA’s new guidance on cost disclosure,” Flood said.
“It’s a temporary solution, but it does provide more clarity and removes an obstacle for investment in that area. As we go through the next year or so, that should be a key positive for the whole investment company universe.”
For the past couple of months, the manager has been increasing his allocation to renewable energy investment trusts – something he plans to do more of, now that cost hurdles have been removed.
This would have been difficult previously. If Flood in his fund wanted a 30% allocation to alternative investment trusts which published, for example, an ongoing charges figure (OCF) of 1%, he would have to add 30 basis points (the 1% charge multiplied by the 30% allocation) onto his own fund’s OCF, “effectively double counting costs,” he explained.
This made a “material” difference given that advisors are keenly focused on consumer duty and whether they're getting value for money.
“Value for money is the right thing to be looking at, but that's not what was happening here. There was an artificial inflation of the costs,” Flood explained.
He has been adding to investment trusts focusing on renewable energy infrastructure, including Greencoat Renewables, Greencoat UK Wind and Gresham House Energy Storage.
“We quite like the renewable infrastructure place, where you've got very strong free cash flow, inflation-linked revenue streams and large discounts which have gone up with interest rates,” he said.
The Greencoat trusts invest in real assets with inflation-linked revenue streams and “now is a reasonable time to start putting on more inflation protection,” he said.
On top of that, discount have widened and sentiment in the area has been “fairly negative” over the past year. So much so that Flood sold out of “a large allocation” at the end of 2022 and the start of 2023.
“We feel now is the time to be to move it back in that direction,” he said.
For battery storage it's not the inflation linkage attracting Flood, but rather the potential upside if things start to go their way. “There’s a lot more upside to these names, which are a bit more growth orientated,” he said.
ESO, the electricity system operator for Great Britain, is not using batteries but gas as a backup energy facilitator, and the manager thinks that is going to change.
“We've seen comments come out around ESO’s focus on making sure that the energy system works at the lowest possible cost, but also lowest carbon footprint. That should be a positive tailwind for the space in the next two to three years,” he concluded.