The Lemon Fool

An article in today's FT which discusses recent legislation as applied to Investment Trusts

The way the FCA interprets these pieces of legislation compels investment trusts to report their costs in the same format as open-ended funds. The result is that investment trusts look more expensive than they actually are.

https://www.ft.com/content/eae525ef-548 ... fd29065b33

That's been known for some time. Experienced investors usually just ignore the KIID. At one time it could be argued that the misleading KIID information was part of the price of ever cloaer union in the EU, but the FCA no longer have that excuse.

What's misleading is that perhaps you want to know the costs of running the Trust and also its costs if borrowing. Add the two togethar and you get neither,

Alaric wrote:That's been known for some time. Experienced investors usually just ignore the KIID. At one time it could be argued that the misleading KIID information was part of the price of ever cloaer union in the EU, but the FCA no longer have that excuse.

Surely the overwhelming majority of EU financial rules originate in the UK. Are you saying this was an exception?

UncleEbenezer wrote:[
Surely the overwhelming majority of EU financial rules originate in the UK. Are you saying this was an exception?

I doubt it. Perhaps that's why the FCA are dragging their feet over dumping it, because it's their fault in the first place.

Alaric wrote:

UncleEbenezer wrote:[
Surely the overwhelming majority of EU financial rules originate in the UK. Are you saying this was an exception?

I doubt it. Perhaps that's why the FCA are dragging their feet over dumping it, because it's their fault in the first place.

It doesn't look like it according to this -

https://www.parliament.uk/business/lord ... pretation/

In a letter to the FCA’s chief executive, published today, the committee is critical of the UK’s application of retained EU Regulations which requires investment trusts to report costs in the same format as unlisted open-ended funds.

There can be a difference between what's required and what actually happens.

I've seen Investment Trusts where the fees shown on the KID don't match those on the monthly factsheet, with the latter being higher. I queried this and the provider didn't seem to care.

I'd like to see laws that compel providers to show their TOTAL costs, including all fees, management charges, trading costs and costs where they invest in another fund with fees. Ultimately, that's all money the investor isn't receiving, so he should know about it.

As it stands, I think the KIDs are worse than useless, as they might kid some less careful investors into thinking that they're checking out all necessary information.

Whilst we're at it, when I buy an Investment Trust, my brokers have a time wasting screen that shows me the total costs of this investment. In the case of AJ Bell, the calculation is usually wrong, as it doesn't take into account the cap on fees paid to AJB for Investment Trusts in a portfolio.

jaizan wrote:I'd like to see laws that compel providers to show their TOTAL costs, including all fees, management charges, trading costs and costs where they invest in another fund with fees. Ultimately, that's all money the investor isn't receiving, so he should know about it.

That's more or less the logic behind the KIID disclosures. Where it breaks down and gives a distorted picture is the inclusion of interest on borrowings, Whilst this reduces the returns to investors, it also potentially enhances them, by vurtue of gearing. A t the very least the cost of borrowing should be itenised separately from all other costs as it's not a feature available to competing collective investments such as OIECs and mainstream ETFs.

jaizan wrote:As it stands, I think the KIDs are worse than useless, as they might kid some less careful investors into thinking that they're checking out all necessary information.

It's even worse than that.

Folks may remember John Kay's 2018 "burn before reading" recommendation about them, in good part 'cos of the very favourable yet moderate risk outcomes the Scottish Mortgage KID was presenting for the trust, because the methodology for that part is based on returns and volatility over the previous five years.

I.e. despite the FCA repeatedly chanting the "past performance is not a guide to future returns" mantra, that's exactly what the KID does.

The 2018 KID classified Scottish Mortgage as risk category four out of seven. The current KID has it at six....

https://citywire.com/investment-trust-insider/news/scottish-mortgage-burn-disastrous-kid-documents/a1085525