Cost disclosure
Open-ended funds have one price, a net asset value, which is also the unit price and therefore the price the client receives when they sell investment.
However, investment trusts have two values, the price at which the investment trust shares trade on the stock market, and a net asset value, which is the value of the underlying investments.
With investment trusts, these two values are rarely the same, with the share price trading at either a premium or a discount to the net asset value.
The rules as written, according to Gravis Capital’s Bill MacLeod, may imply that an investor has a legal right to the repayment of the net asset value of their investment, even if this is a higher cash amount than the value of the shares they own.
Right now, the average investment trust trades at a discount of 10.8 per cent, that is, the difference between the net asset value and the share price, according to data from the Association of Investment Companies.
An investor selling their shares gets the share price amount, not the net asset value amount.
The signatories to this consultation are concerned that the wording of the proposed new legislation may confuse investors into thinking they are entitled to the net asset value amount.
Bill MacLeod, managing director at Gravis Advisory, said the new rules “don’t really address” the issue of how investment trusts are treated in legislation.
He wants investment trusts to be excluded from the new regulations on cost disclosures, so they are treated as neither the same as equities or open-ended funds.
This call is echoed by Richard Stone, chief executive of the AIC, who said: "Regulated cost disclosure in its current form causes market distortions. It creates incentives for investment firms to hold investments that do not have an explicit cost disclosure, such as trading company shares.
"The costs disclosed can be inherently misleading where they do not compare like with like or exaggerate the cost of holding an investment, particularly where an investment company is holding unquoted assets.
"For investment companies the simplest way to resolve these problems is to remove them from the scope of regulated cost disclosure. Transparency will be maintained as their shares are traded on the stock market.
"This means that they make disclosures like any other listed company. The market in turn provides a strong discipline to bear down on excessive costs.
