150 years of investment trusts
Trusts have a long history in the UK dating back to the Victorian era when they funded railways and other engineering projects. Trusts today continue that tradition by investing in areas such as renewable energy, transport, and other infrastructure.
abrdn is the third largest manager globally of closed end funds, with a heritage spanning over one hundred and fifty years. abrdn-managed Dunedin Income Growth has been serving shareholders since 1873, making it the third oldest investment trust in the world.
There are over 350 investment trusts on the stock market. Between them, controlling over £250 billion of assets.
Constraining demand for trusts
In March, abrdn’s Chairman Douglas Flint, along with over 130 other senior financiers signed a letter to the British Chancellor calling for a review of cost disclosure rules.
The rules as currently interpreted have distorted investment trust charges relative to open end funds and listed commercial companies, creating an uneven playing field both domestically and internationally.
This disincentive to invest ultimately leads to reduced demand for investment trusts. As investment trusts are crucial investors in sectors such as renewable energy and biosciences, the knock-on effect of this reduced investment is significant. The letter to Jeremy Hunt argues that investment trusts are missing out on £7bn per year.
Double counting of costs
Retained EU law has left us with an uncomfortable legacy, requiring UK-listed investment companies and funds that invest in them to publish the costs of financing, operating, and maintaining real assets such as property, infrastructure or renewable energy.
That’s despite the fact that these costs are already published in regular company updates and reflected in the share price for all investment companies, and for investors it amounts to a double counting of costs.
It is double counting because ‘costs’, such as management fees, building maintenance and interest expense, are accounted for in the value of the share price, just as they would be for any other listed operating company, with key financials laid out in the report and accounts.
Equally, it is a double counting for funds (either active or passive) investing in listed closed end funds to have to aggregate these regulated cost disclosures with their own costs, again because the costs are already accounted for in the performance of the holding and the value of the underlying holding.
Just like any listed company, investors buy and sell at the share price not the net asset value, and the differences between the two can be significant, unlike open ended funds or ETFs.
The closed end fund sector has weathered over one hundred and fifty years of market ups and downs on the global stage. It’s striking that the greatest challenge of recent times has been due to a technical issue closer to home - the UK’s interpretation of retained EU law. This has distorted charges on closed end funds compared to competitors both at home and internationally.
Christian Pittard, Head of Closed End Funds, abrdn
Stalling progress
The impact of the cost disclosure rules on the closed end fund sector has been widely documented and acknowledged by regulators.
A private member's bill was introduced in the House of Lords last November, raised by Baroness Altmann and supported by Baroness Bowles. After a seconding reading of the Bill in March 2024, there was hope of continued momentum, but with no update in the Spring Budget, abrdn believes progress is at risk of stalling.
A call for action
Keeping investment trust competitive is of vital importance to their investors and to the London Stock Exchange, with closed end funds accounting for over a third of the FTSE 250. In addition, investment trusts play a crucial role in advancing infrastructure projects and providing investors exposure to high-potential private companies. As such, abrdn continues to call for an urgent review to current cost disclosure rules.