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Essential Investment Trusts

Closed-end funds and OEICs
mc2fool
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Re: Essential Investment Trusts

#431193

Postby mc2fool » July 29th, 2021, 12:06 pm

absolutezero wrote:
Lootman wrote:
absolutezero wrote:Just a thought about European Assets Trust (EAT).
I've been looking through its portfolio. Lots of low yielding shares, but the trust as whole is over 5% yield.
Seems the income comes from selling shares - based on 6% of the NAV at 31st December each year
How sustainable is this, do we think?

I would refer you to an entire recent topic on ITs that pay income out of capital:

viewtopic.php?f=54&t=29770

It works fine as long as markets do not have multi-year bear markets.

Thank you.
It does seem a bit of a house of cards, working on the idea that share prices will only ever increase.... (like house prices :roll: )

It doesn't work on the idea that share prices will only ever increase -- if the NAV goes down you get less of a dividend, and, yes, if there is a multi-year bear market then they could eventually run out of distributable reserve (which is revenue reserve plus previously realised capital gains) to top up the revenue received to the 6% of NAV mark, in which case they'll simply say, sorry, but the dividend this year is just the revenue received (i.e. dividends they received from their holdings).

Personally I just don't get the appeal of this % of NAV approach (no matter how low or high the % is and whether or not it requires topping up from capital reserves), as most "income" investors seek reliability of the level of income, and the % of NAV approach guarantees that won't happen....

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Re: Essential Investment Trusts

#431201

Postby absolutezero » July 29th, 2021, 12:23 pm

mc2fool wrote:
absolutezero wrote:
Lootman wrote:I would refer you to an entire recent topic on ITs that pay income out of capital:

viewtopic.php?f=54&t=29770

It works fine as long as markets do not have multi-year bear markets.

Thank you.
It does seem a bit of a house of cards, working on the idea that share prices will only ever increase.... (like house prices :roll: )

It doesn't work on the idea that share prices will only ever increase -- if the NAV goes down you get less of a dividend, and, yes, if there is a multi-year bear market then they could eventually run out of distributable reserve (which is revenue reserve plus previously realised capital gains) to top up the revenue received to the 6% of NAV mark, in which case they'll simply say, sorry, but the dividend this year is just the revenue received (i.e. dividends they received from their holdings).

Personally I just don't get the appeal of this % of NAV approach (no matter how low or high the % is and whether or not it requires topping up from capital reserves), as most "income" investors seek reliability of the level of income, and the % of NAV approach guarantees that won't happen....

Indeed. It would surely make more sense for them to buy higher yielding companies and use those dividends.

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Re: Essential Investment Trusts

#431223

Postby mc2fool » July 29th, 2021, 1:14 pm

absolutezero wrote:
mc2fool wrote:Personally I just don't get the appeal of this % of NAV approach (no matter how low or high the % is and whether or not it requires topping up from capital reserves), as most "income" investors seek reliability of the level of income, and the % of NAV approach guarantees that won't happen....

Indeed. It would surely make more sense for them to buy higher yielding companies and use those dividends.

I think you've missed my point. It's the "% of NAV" that I don't get the appeal of, rather than how the dividend is arrived at (that's a separate matter!).

Let's suppose the IT did buy higher yielding companies but still had a policy of dividends issued being 6% of NAV then they would still lack reliability of the level of income as the dividends would go up and down with the NAV.

(Yes, I do know about and am ignoring the 85% rule for the purposes of this point!)

Even the "create income from capital" proponents don't apply their "safe withdrawal rate" to annual values. They say you should determine your SWR, say 4%, and then withdraw that much of the initial capital each year (possibly adjusting for inflation), so that you get a constant (real) £ amount of income to live off of.

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Re: Essential Investment Trusts

#431393

Postby absolutezero » July 30th, 2021, 10:26 am

mc2fool wrote:
absolutezero wrote:
mc2fool wrote:Personally I just don't get the appeal of this % of NAV approach (no matter how low or high the % is and whether or not it requires topping up from capital reserves), as most "income" investors seek reliability of the level of income, and the % of NAV approach guarantees that won't happen....

Indeed. It would surely make more sense for them to buy higher yielding companies and use those dividends.

I think you've missed my point. It's the "% of NAV" that I don't get the appeal of, rather than how the dividend is arrived at (that's a separate matter!).

Let's suppose the IT did buy higher yielding companies but still had a policy of dividends issued being 6% of NAV then they would still lack reliability of the level of income as the dividends would go up and down with the NAV.

(Yes, I do know about and am ignoring the 85% rule for the purposes of this point!)

Even the "create income from capital" proponents don't apply their "safe withdrawal rate" to annual values. They say you should determine your SWR, say 4%, and then withdraw that much of the initial capital each year (possibly adjusting for inflation), so that you get a constant (real) £ amount of income to live off of.

Yes. Inclined to agree here. To get a rising (or even steady) dividend requires year on year growth in NAV/share price.

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Re: Essential Investment Trusts

#431399

Postby dundas666 » July 30th, 2021, 10:36 am

I think the general idea behind the %NAV approach is that you get to invest in a "Growth" portfolio but with the income withdrawal mechanism of a typical "Income" portfolio - dividends, and plenty of them! So for those who wanted to adopt a more TR approach but didn't feel comfortable managing a portfolio of Growth ITs and/or shares for income, they could simply select these ITs instead.

Also the other main attraction would be a faster growth in the yield in the long term, albeit much more volatile as you've mentioned.

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Re: Essential Investment Trusts

#431403

Postby SalvorHardin » July 30th, 2021, 10:44 am

mc2fool wrote:It's the "% of NAV" that I don't get the appeal of, rather than how the dividend is arrived at (that's a separate matter!).

Let's suppose the IT did buy higher yielding companies but still had a policy of dividends issued being 6% of NAV then they would still lack reliability of the level of income as the dividends would go up and down with the NAV.

(Yes, I do know about and am ignoring the 85% rule for the purposes of this point!)

Even the "create income from capital" proponents don't apply their "safe withdrawal rate" to annual values. They say you should determine your SWR, say 4%, and then withdraw that much of the initial capital each year (possibly adjusting for inflation), so that you get a constant (real) £ amount of income to live off of.

The % of NAV as dividend investment trusts enable income seeking investors to invest in shares whose anticipated returns will mostly come from capital growth but without needing to give up too much income in the process. The sort of shares that you would hardly ever see in an income investment trust.

If you chase higher yielding shares then you are forced to exclude a large part of the stockmarket, notably low yielding shares and non-dividend payers, which typically have much better capital growth prospects.

The classic HYP is a great example of income seeking investors being forced into a particular section of the global stockmarket, and therefore rendering themselves unable to invest esewhere. Their need to generate a high income excludes most of the stockmarket (which is then compunded by restricting yourself to the FTSE100).

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Re: Essential Investment Trusts

#431416

Postby mc2fool » July 30th, 2021, 11:23 am

absolutezero wrote:Yes. Inclined to agree here. To get a rising (or even steady) dividend requires year on year growth in NAV/share price.

Only if you go for the % of NAV approach. Otherwise, no you don't. That's what reserves are for. See ITs like CTY and many other "dividend heroes".

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Re: Essential Investment Trusts

#431428

Postby mc2fool » July 30th, 2021, 11:47 am

dundas666 wrote:I think the general idea behind the %NAV approach is that you get to invest in a "Growth" portfolio but with the income withdrawal mechanism of a typical "Income" portfolio - dividends, and plenty of them!

SalvorHardin wrote:The % of NAV as dividend investment trusts enable income seeking investors to invest in shares whose anticipated returns will mostly come from capital growth but without needing to give up too much income in the process. The sort of shares that you would hardly ever see in an income investment trust.

Yes, I get the "more growthy type holdings" bit, but for the income investor % of NAV means volatility of income, which would then require your own reserves mechanism, at which point you might as well just buy "growth" ITs and sell off a slice of them each year, just as the "create income from capital" proponents say. ;)

Now if instead there was a policy of providing a £ stable or growing dividend, and getting it from shares whose anticipated returns mostly come from capital growth, then I could understand the attraction to income investors, but without the "smoothing"/"dividend hero" feature the % of NAV ITs seem a half done job for income investors, halfway between just managing your own portfolio of shares, with reserving, and getting someone else to do it as the "dividend hero" income ITs do....

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Re: Essential Investment Trusts

#431445

Postby SalvorHardin » July 30th, 2021, 12:21 pm

mc2fool wrote:Yes, I get the "more growthy type holdings" bit, but for the income investor % of NAV means volatility of income, which would then require your own reserves mechanism, at which point you might as well just buy "growth" ITs and sell off a slice of them each year, just as the "create income from capital" proponents say. ;)

Now if instead there was a policy of providing a £ stable or growing dividend, and getting it from shares whose anticipated returns mostly come from capital growth, then I could understand the attraction to income investors, but without the "smoothing"/"dividend hero" feature the % of NAV ITs seem a half done job for income investors, halfway between just managing your own portfolio of shares, with reserving, and getting someone else to do it as the "dividend hero" income ITs do....

I can think of three reasons to avoid selling shares to create your own income from capital (I'm assuming that our investor sells 1% of their shares every quarter):

1) Administration. Do you really want to place four more small sale orders every year?

2) Cost. Four minimum commissions every year. Let's say your holding is worth £10,000 with a £10 minimum commission. Your minimum commissions will eat up around 10% of your "dividend" every year (the exact percentage is affected by movements in the share price).

3) Capital Gains Tax. You are creating 4 separate chargeable events every year. That's no problem if your holdings are in an ISA. But it creates a lot of work if you're someone like me who submits a capital gains tax return every year and can't get everything into an ISA. You've got to keep accurate records and woe betide if a future government changes the CGT rules regarding pooling and share identification. Or you have to take up space in your ISAs with these shares when you'd prefer to have something else in your ISAs.

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Re: Essential Investment Trusts

#431459

Postby mc2fool » July 30th, 2021, 12:49 pm

SalvorHardin wrote:
mc2fool wrote:Yes, I get the "more growthy type holdings" bit, but for the income investor % of NAV means volatility of income, which would then require your own reserves mechanism, at which point you might as well just buy "growth" ITs and sell off a slice of them each year, just as the "create income from capital" proponents say. ;)

Now if instead there was a policy of providing a £ stable or growing dividend, and getting it from shares whose anticipated returns mostly come from capital growth, then I could understand the attraction to income investors, but without the "smoothing"/"dividend hero" feature the % of NAV ITs seem a half done job for income investors, halfway between just managing your own portfolio of shares, with reserving, and getting someone else to do it as the "dividend hero" income ITs do....

I can think of three reasons to avoid selling shares to create your own income from capital (I'm assuming that our investor sells 1% of their shares every quarter):

1) Administration. Do you really want to place four more small sale orders every year?

2) Cost. Four minimum commissions every year. Let's say your holding is worth £10,000 with a £10 minimum commission. Your minimum commissions will eat up around 10% of your "dividend" every year (the exact percentage is affected by movements in the share price).

3) Capital Gains Tax. You are creating 4 separate chargeable events every year. That's no problem if your holdings are in an ISA. But it creates a lot of work if you're someone like me who submits a capital gains tax return every year and can't get everything into an ISA. You've got to keep accurate records and woe betide if a future government changes the CGT rules regarding pooling and share identification. Or you have to take up space in your ISAs with these shares when you'd prefer to have something else in your ISAs.

Yes, but you're kinda missing my point, which is that one of the attractions of "traditional" income ITs is the income "smoothing", which provides a reliable and predictable income for the investor. The % of NAV ITs, by the very nature of their dividend policy, lack that feature, which I am suggesting is a negative for "income" investors, it would have been for me when I was one.

Sure, you can DIY that part, but that's why I say they're a half done job for income investors; 'cos the investor has to DIY the smoothing bit. It is perfectly possible for an IT to invest in more growthy type holdings and provide a reliable and predictable dividend from capital. One example I know of (and hold) is RCP, RIT Capital Partners (although with a yield of only 1.4% I doubt many would call them an income IT!). I don't follow the income sectors anymore, but surely there must be others?

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Re: Essential Investment Trusts

#431470

Postby Wuffle » July 30th, 2021, 1:11 pm

Really????

Income and by association spending needs to be the fixed part and we argue over how to structure to achieve that.
Does anybody really live their life like that?
Especially contributors here.
We are talking about swerving a posh coffee or a holiday amongst the investing classes, not heating.
I want an IT to quietly take care of some leverage for me and some strategic buybacks at a scale that is awkward and cost prohibitive for me but I can subtly modulate my spending without cost and almost any effort at all.

I don't see this as a point of divergence with any merit.

W.

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Re: Essential Investment Trusts

#431474

Postby mc2fool » July 30th, 2021, 1:22 pm

Wuffle wrote:We are talking about swerving a posh coffee or a holiday amongst the investing classes, not heating.

Speak for yourself. When I was an income investor my savings & investments were my only source of income, and so, yes, heating ... and electricity, food, phone, council tax, insurance, everything ... and it was that way for a bit over twenty years until my various pensions started kicking in.

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Re: Essential Investment Trusts

#431479

Postby Itsallaguess » July 30th, 2021, 1:36 pm

mc2fool wrote:
one of the attractions of "traditional" income ITs is the income "smoothing", which provides a reliable and predictable income for the investor.

The % of NAV ITs, by the very nature of their dividend policy, lack that feature, which I am suggesting is a negative for "income" investors, it would have been for me when I was one.

Sure, you can DIY that part, but that's why I say they're a half done job for income investors; 'cos the investor has to DIY the smoothing bit.


I think you've got a point, but I don't personally think it's as big an issue as you might be making out, depending on the wider income strategy being used.

If we might agree that it's likely that there'll be some level of 'income float' in any given income-strategy, where the actual yearly income taken from an income-strategy is less than the yearly dividends delivered from it, and there's some level of re-investment going on with any additional dividends received over and above those used for spending, and if we agree that it might be likely that the '% NAV' dividends are only part of the overall dividends being received, with the others from dividend-sources that do involve their own 'dividend smoothing' processes, then we might get to a point where any of the 'income fluctuation' that you're rightly highlighting, that might come from these types of '% NAV' elements, might largely be affecting the 'float' element of some income strategies, and not necessarily be affecting the actual 'payment' side of things too much, perhaps, with a fair wind over a number of years...

So if we might see an income-strategy that does involve an element of re-investment allowing these '% NAV payment' elements to largely influence that 're-investment' side of things, rather than the 'payment' side of things, then we might come to ask if that potential downside (and we must acknowledge that there is a downside to that process, even if it largely might not even affect the taken payments themselves..) is acceptable, given that taking that potential downside on board then opens up a section of the investment market that's otherwise been difficult to access for those investors who see some benefit in maintaining a largely 'hands-off' approach to income-delivery, and personally, I think it does begin to do that....

You're right though - it does introduce a potential element of variability that needs to be taken into account, to see if such variances in '% NAV' payments might bleed over into what might well be very important 'income delivery areas' of any given income-strategy, but I think that so long as these types of '% NAV' elements are a relatively small sub-section of a larger overall income-portfolio, and so long as there's enough 're-investment float', over and above any 'payment requirements' in an income-strategy that might use them, then I think there's perhaps less of an overall income-strategy-level problem than you might be making of it....

Cheers,

Itsallaguess

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Re: Essential Investment Trusts

#431489

Postby mc2fool » July 30th, 2021, 2:25 pm

Itsallaguess wrote:
mc2fool wrote:one of the attractions of "traditional" income ITs is the income "smoothing", which provides a reliable and predictable income for the investor.

The % of NAV ITs, by the very nature of their dividend policy, lack that feature, which I am suggesting is a negative for "income" investors, it would have been for me when I was one.

Sure, you can DIY that part, but that's why I say they're a half done job for income investors; 'cos the investor has to DIY the smoothing bit.

I think you've got a point, but I don't personally think it's as big an issue as you might be making out ...

Neither do I. :D While I do think it's a negative, I suspect it's come across as a bigger issue than I intended 'cos of me repeating it 'cos of folks missing the point and/or focussing on other aspects.

In my income investing days I was (mostly) HYP-ish, sort of, so was well used to fluctuations, safety margins, floats, etc. OTOH the likes of the CTY holding and income dependent grannies (to pick a stereotype) could well be :shock: and :o by the likes of EAT... ;)

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Re: Essential Investment Trusts

#525428

Postby absolutezero » August 26th, 2022, 12:13 pm

Thought I would dig this one up.

I have a a lump of cash to deploy and am looking for a new IT to put it into.
Looking for growth over income and ideally an inflation hedge.

It will be held outside ISA/SIPP so I am avoiding an ETF as the foreign taxation and Excess Reportable Income thing annoy me.

I currently hold various individual companies and trackers but the ITs already hold are:
RIT Capital Partners - RCP
City of London - CTY
Blackrock Energy and resources Trust - BERI
F&C IT - FCIT

Topping up some of these is always an option but fnacy something new. Maybe.
Not keen on Scottish Mortgage. Seems overhyped and cultish to me.

Any suggestions and rationale welcome.

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Re: Essential Investment Trusts

#525432

Postby Dod101 » August 26th, 2022, 12:23 pm

absolutezero wrote:Thought I would dig this one up.

I have a a lump of cash to deploy and am looking for a new IT to put it into.
Looking for growth over income and ideally an inflation hedge.

It will be held outside ISA/SIPP so I am avoiding an ETF as the foreign taxation and Excess Reportable Income thing annoy me.

I currently hold various individual companies and trackers but the ITs already hold are:
RIT Capital Partners - RCP
City of London - CTY
Blackrock Energy and resources Trust - BERI
F&C IT - FCIT

Topping up some of these is always an option but fnacy something new. Maybe.
Not keen on Scottish Mortgage. Seems overhyped and cultish to me.

Any suggestions and rationale welcome.


Caledonia is a very obvious candidate. It is primarily into growth but increases its relatively modest dividend every year with occasional specials, such as we had earlier this month. It is nothing like SMT. It has a good spread of investments as you will see if you take a look at its website.

Dod

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Re: Essential Investment Trusts

#525438

Postby absolutezero » August 26th, 2022, 12:41 pm

Dod101 wrote:
absolutezero wrote:Thought I would dig this one up.

I have a a lump of cash to deploy and am looking for a new IT to put it into.
Looking for growth over income and ideally an inflation hedge.

It will be held outside ISA/SIPP so I am avoiding an ETF as the foreign taxation and Excess Reportable Income thing annoy me.

I currently hold various individual companies and trackers but the ITs already hold are:
RIT Capital Partners - RCP
City of London - CTY
Blackrock Energy and resources Trust - BERI
F&C IT - FCIT

Topping up some of these is always an option but fnacy something new. Maybe.
Not keen on Scottish Mortgage. Seems overhyped and cultish to me.

Any suggestions and rationale welcome.


Caledonia is a very obvious candidate. It is primarily into growth but increases its relatively modest dividend every year with occasional specials, such as we had earlier this month. It is nothing like SMT. It has a good spread of investments as you will see if you take a look at its website.

Dod

I have considered Caledonia before.
This is the one with a massive discount on NAV. Possibly caused by the family having a large interest in the shares.
I notice the free float is only around 60% of the share capital.
Is the large family interest a problem? Could be seen as a long term positive as it's their family's riches I suppose.

The running cost at 1.71% is rather steep!

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Re: Essential Investment Trusts

#525444

Postby absolutezero » August 26th, 2022, 12:59 pm

absolutezero wrote:
The running cost at 1.71% is rather steep!

Corrrection: AIC website has it at 0.84%

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Re: Essential Investment Trusts

#525454

Postby Dod101 » August 26th, 2022, 1:24 pm

absolutezero wrote:
Dod101 wrote:
absolutezero wrote:Thought I would dig this one up.

I have a a lump of cash to deploy and am looking for a new IT to put it into.
Looking for growth over income and ideally an inflation hedge.

It will be held outside ISA/SIPP so I am avoiding an ETF as the foreign taxation and Excess Reportable Income thing annoy me.

I currently hold various individual companies and trackers but the ITs already hold are:
RIT Capital Partners - RCP
City of London - CTY
Blackrock Energy and resources Trust - BERI
F&C IT - FCIT

Topping up some of these is always an option but fnacy something new. Maybe.
Not keen on Scottish Mortgage. Seems overhyped and cultish to me.

Any suggestions and rationale welcome.


Caledonia is a very obvious candidate. It is primarily into growth but increases its relatively modest dividend every year with occasional specials, such as we had earlier this month. It is nothing like SMT. It has a good spread of investments as you will see if you take a look at its website.

Dod

I have considered Caledonia before.
This is the one with a massive discount on NAV. Possibly caused by the family having a large interest in the shares.
I notice the free float is only around 60% of the share capital.
Is the large family interest a problem? Could be seen as a long term positive as it's their family's riches I suppose.


I follow the money (as you are doing with RIT) and it has certainly paid off. I see the big family interest as a positive as I do with RIT. What we need to remember with this sort of IT is that it is the family that is calling the shots. The outside shareholder has no clout but that has worked to the outside shareholder's benefit I think, certainly in the case of Caledonia. It also has the advantage to me that it is not like the average IT in that it holds a small amount of publicly quoted shares but many of its holdings are privately held so that it acts more like a private equity fund, but without loading up the holdings with debt. That sort of investment company will be getting more offers than it could ever handle which enables it to pick and choose. The family and its investment style has, as far as I know, got a high reputation with those that matter in the City and beyond.

Dod

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Re: Essential Investment Trusts

#525488

Postby SalvorHardin » August 26th, 2022, 3:40 pm

absolutezero wrote:I have considered Caledonia before.
This is the one with a massive discount on NAV. Possibly caused by the family having a large interest in the shares.
I notice the free float is only around 60% of the share capital.
Is the large family interest a problem? Could be seen as a long term positive as it's their family's riches I suppose.

The running cost at 1.71% is rather steep!

IMHO the family interest isn't a problem except that it prevents Caledonia from running a large buyback program. This is because the Cayzers would be forced to make a takeover bid for Caledonia if their collective share of it became much larger as the takeover panel treats them as a "concert party".

The KIID ongoing costs should be taken with a big pinch of the proverbial salt. A few years ago I looked at the method used for the KIID and it's very misleading.

KIID's include an estimate, which is added to the management fee, that takes into account previous transaction costs. So if you're a business like Caledonia which has private equity transactions then all of the costs involved with a purchase of sale are not treated as a one-off cost but instead get swept up in the KIID as a recurring cost. Very misleading since the purchase or sale of a business is a one-off transaction.

If an investment trust has a major portfolio restructuring, as sometimes happens when new managers are appointed, then all of the costs incurred as a result are treated as recurring in future years rather than as a one-off.

The KIID also includes the interest on all borrowings, but no allowance is made for the additional returns that might be produced by investing the borrowed money. If an investment trust borrows money and pays £X in interest on it, whilst earning £X on the money, I'd argue that the cost of the borrowing is nothing. The KIID instead adds £X to the total charges.

A few years ago Law Debenture was quoted by some sources as having annual cost of over 7%, whereas the annual management fee was 0.3%. It turned out that the calculation treated all of the running costs of its fairly substantial unquoted fiduciary services business as an ongoing cost for the purposes of the KIID. If you produce a KIID for an operating company you're going to get some high costs. I just did a quick calculation for Diageo (costs and interest paid were approximately £18.9 billion in the last financial year) and the Diageo "KIID" ongoing charges are about 22% of market value or 247% of NAV.

Earlier this week I bought some shares in the Macau Property Opportunities Fund (MPO), which has been hammered in the last few years and was trading at a discount of almost 70% of its NAV. MPO is in the process of being wound up so the managers are trying to its remaining properties. The KIID quotes a fee of 6.07%, a big part of which is the costs of selling properties in the previous year.


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