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Price vs Value

4th February 2022

This week we re-open a can of worms and intend to return to this subject again over the coming weeks and months: how to define the total cost of investing.

Last week, our Authorised Corporate Director (ACD), Maitland Institutional Services, informed us that the Investment Association (IA) – the body that oversees the sectors in which our funds sit – issued renewed guidelines recommending that the cost of investment trusts be included in the calculation of fund OCFs.

Warning: this is a subject we feel very passionately about and we feel very strongly that this is a nonsensical approach to presenting the cost of investing that may very well do the opposite of what is intended.

The intention is clear: the IA want to ensure maximum transparency and thus protect underlying investors who need to know exactly what the total cost of their investments are before they invest: i.e. if they invest £1,000 and nothing happens to the investment, how much would they be left with after 1 year. All very laudable.

With all funds, there are a whole host of costs to consider: the management fee that the fund manager charges, the admin costs of running the fund, the transactions costs incurred when the fund manager trades. These costs are incurred whether the fund is open- or closed-ended (i.e. an investment trust). The IA wants these not only disclosed but included in the costs of portfolios investing in them. We have no issue including the costs of investing in open-ended funds.

First, consider equities. Equities apparently are cost-free investments. Really? What about a loss making company? Shareholder equity would be reduced every year while that company is loss-making in the same way the NAV of a fund is reduced by annual management fees. Why isn’t this a cost of investment? What about two companies in the same sector – one with a vastly higher cost base (e.g. because of higher salaries). Shouldn’t there be a way of differentiating the cost of investment?

Second, consider two investment trusts that do exactly the same thing, and yet have completely different costs of investment under IA guidelines. Were it to be “internally managed” – i.e. the managers are employees – then the vehicle is treated as an equity with zero cost of investment. Were it to be “externally managed” – i.e. the managers are employed by the Board on term-contracts – the cost of those managers (and many other costs) must be declared separately. Ludicrous.

What about an investment in an asset class that can only be accessed via an investment trust? You will have heard us talk about all the wonderful less liquid asset classes we can access via investment trusts. One can’t access these via open-ended funds. The cost of these investment trusts is the cost of their doing business in offering investors access to the assets. It is no different to the cost of doing business for any other operating company. These costs should not be included in the same way the OCF of an open-ended fund must be. It is not a level-playing field!

The one sector of investment trusts where we would have sympathy in having to declare costs is those trusts which only invest in liquid assets accessible via open-ended funds and thus directly compete with open-ended funds. The point being, if the trust is doing something which the investor cannot access in any other format, then forcing fund managers like us to include the costs of these in their own OCF is overly penal.

In the current climate, intermediaries (like financial advisers who direct investment flows to wealth and fund managers) are determined to keep the optical cost of the portfolios of their clients as low as possible. The FCA forces them to show these costs in such a way that clearly incentivises clients to avoid any fund with a high optical cost. Thus portfolio managers (whether they be fund of fund managers like us, or discretionary investment managers) are in turn encouraged to avoid any investment that increases the portfolio cost too much. Such managers simply won’t bother with so many assets: listed private equity, many REITs, direct lending, ships, energy storage, music royalties and many more. The result? Less diversified portfolios, poorer investment outcomes and a significant headwind to the development of investment trusts offering access to fantastic opportunities among alternative assets. When we market our Funds, we find that many potential clients simply screen us out of their filters since our OCFs are too high – despite our excellent post-fee track records.

Hawksmoor Fund Managers won’t be deterred. We’ll keep investing to the benefit of our clients, whatever costs we are forced to declare. After-all, the true cost of any investment is not the ex-ante cost, but the performance after fees that you miss out on by going with the optically cheapest portfolios. This is not the last you will hear from us on this.

Ben Conway – Head of Fund Management

Ben Conway

This financial promotion is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC82

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