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Tracker Trusts

Closed-end funds and OEICs
OllyDrod
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Tracker Trusts

#403367

Postby OllyDrod » April 11th, 2021, 10:51 am

A friend recently asked me why there were no tracker ITs. I am aware that these did exist and wound up largely because of high fees relative to open-ended equivalents. I think Aberdeen UK Tracker (AUKT) was the last of them - dissolved in 2017. The question got me thinking though and I'd appreciate your views -

1) I don't believe the trust structure necessarily inculcates higher fees than an open-ended fund (but I stand to be corrected). I appreciate management companies might wish to earn higher fees elsewhere, but leaving that to one side, is there a reason a hypothetical Tracker Trust could not adopt a competitive fee structure?

2) Are the benefits of the trust structure (revenue reserve, independent board, closed-ended nature negating the risk of forced-selling to meet redemptions, etc) somehow less applicable if a hypothetical Tracker Trust were to simply track an index? (I don't believe so - if anything I think a passive investor may value the greater certainty regarding income the trust structure can provide...)

3) Is there any other reason we have no Tracker Trusts these days..?

Thanks Lemons
- OllyDrod

Alaric
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Re: Tracker Trusts

#403379

Postby Alaric » April 11th, 2021, 11:25 am

OllyDrod wrote:A friend recently asked me why there were no tracker ITs. I am aware that these did exist and wound up largely because of high fees relative to open-ended equivalents.


A key feature of ITs is that the price investors pay to purchase or sell shares in the Trust is determined by the market rather than the Net Asset Value. As a consequence, tracking error as far as investors are concerned could be far higher than an OIEC or ETF, so those structures are preferred.

Although notionally actively managed, there may still be ITs that attempt to closely follow their benchmark index.

scrumpyjack
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Re: Tracker Trusts

#403412

Postby scrumpyjack » April 11th, 2021, 2:26 pm

The possibly big advantage of an IT tracker, for those investors that want it, is that it would enable gearing.

The trouble is the IT would need to be very big for the 0.1% fee to cover the expenses, the directors fees and nice boardroom lunches etc etc.
It would be hard to get it off the ground.

OllyDrod
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Re: Tracker Trusts

#403461

Postby OllyDrod » April 11th, 2021, 6:19 pm

Alaric wrote:A key feature of ITs is that the price investors pay to purchase or sell shares in the Trust is determined by the market rather than the Net Asset Value. As a consequence, tracking error as far as investors are concerned could be far higher than an OIEC or ETF, so those structures are preferred.

Thanks Alaric, a good point. I can also see some appeal at being able to buy the constituents of an index at a discount to NAV but appreciate the volatility may not suit all investors.

scrumpyjack wrote:The possibly big advantage of an IT tracker, for those investors that want it, is that it would enable gearing.

Agreed - hadn't considered that, but yes - absolutely. Would certainly be an interesting piece of analysis if someone were to compare the 10-year performance of a FTSE tracker fund with an equivalent hypothetical trust with eg an average gearing of 5%. So many variables at play there though - not sure where one would start!

scrumpyjack wrote:The trouble is the IT would need to be very big for the 0.1% fee to cover the expenses, the directors fees and nice boardroom lunches etc etc.
It would be hard to get it off the ground.

I suspect you're right - better opportunities for remuneration elsewhere...

- OllyDrod

DavidM13
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Re: Tracker Trusts

#403522

Postby DavidM13 » April 12th, 2021, 8:26 am

scrumpyjack wrote:The possibly big advantage of an IT tracker, for those investors that want it, is that it would enable gearing.

The trouble is the IT would need to be very big for the 0.1% fee to cover the expenses, the directors fees and nice boardroom lunches etc etc.
It would be hard to get it off the ground.


There are leveraged ETFs e.g. they replicate 2x the movement of the market using derivatives and other highly complex things that I don't understand. There are also REVERSE ETFs or even REVERSE leveraged ETFs!


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