Every collective investment scheme has expenses. Therefore, investors must pay Investment trust annual charges to cover these costs. Usually, trusts have two types of cost.
The first set of fees will come from the fund management company that manages the money and day to day investment matters. Most trusts now charge an annual management fee of between 1 percent and 1.5 percent per year. Some of the older trusts still charge much lower rates though - some under 0.5 percent!
There are also a small number of trusts which charge an additional performance fee. This is usually only paid if the trust has outperformed it's benchmark index in some predetermined way. This is similar to the remuneration model which has made so many hedge fund managers rich. However, as might be imagined, the London Stock Exchange does not let fund managers charge as much as their unregulated hedge fund counterparts.
These fees can be taken from the income or capital of a trust (or both). Each trust will have it's own arrangements for this.
change in fund management approach has been seen throughout the wider
collective investment market. As a result, annual management fees have
risen for most products. Despite this, the cost to run an investment
trust is generally lower than for an OEIC or unit trust. As such, their
fees to investors are usually lower as well.
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The second set of investment trust annual charges relate to the remaining tasks required to operate. These include the costs of publishing annual accounts, auditing and the wages of directors.
When all these costs have been added together, the result is known as a total expense ratio, which is often abbreviated to TER. This number shows the reduction in performance - sometimes known as 'drag' caused by all the yearly operating fees.
It is hopefully redundant to say that it is in the best interests of the investor to locate funds whose performance is acceptable and has the lowest costs possible.
Such a search does pose problems though. As this article by the Guardian newspaper in the United Kingdom explains, the low charges described above mean that there is a limited amount of money from which to pay intermediaries for their sales efforts. In financial services circles, this is known as the "1% world", since with the introduction of Stakeholder pension plans, that is all that is charged to clients each year.
Needless to say, this means that UK IFAs are less likely to sell an investment trust to their clients as they are to sell a unit trust or other OEIC.
Since actual investment performance in the investment trust sector is usually on a par with - or often better than - comparable unit trusts, this means that a savvy client may choose to conduct some of their own investment research instead of leaving everything to their professional guide.
To read more, please see:
What Is An Investment Trust?
What Are The Investment Trust Sectors?
Learn Some Background Investment Trust Information
How Does Investment Trust Net Asset Value Work?
How Do Investment Trust Share Buybacks Work?
What Is An Investment Trust Savings Scheme?
What Are The Different Investment Trust Share Classes?