City of London Investment Trust Removes Performance Fee

PRESS RELEASE 49 (31/07/2013)

ShareSoc welcomes the announcement by City of London Investment Trust that it is to remove the manager’s performance fee. In future it will simply pay a flat fee of 0.365% of assets (or 0.35% when net assets are above £1bn – they are currently 0.7bn).

City of London IT is one of the largest generalist investment trusts and also one of the best performing over the long term. Despite beating its benchmark index last year, and over the last three years, the performance fee was not crystallised last year because it did not exceed the 15% out-performance hurdle rate. Although the base fee will be increased slightly under the new arrangements (it is currently 0.35%), until the net assets grow further, it is still very low.

City of London argue in their announcement that, following the Retail Distribution Review, this will make the company “more attractive to a wider audience of retail investors”. We wholeheartedly agree.

There is no evidence that performance fees have a positive impact on fund performance. To quote from a recent Grant Thornton report on performance fees in investment trusts: “It was however clear that the instigation of performance fees has come largely from management companies and it was also clear that, generally speaking, the introduction of performance fees did not of itself lead to an improvement in performance or to a material effect on the style of individual managers”.

Indeed one can see this from the comparative performance of two Venture Capital Trusts which have the same manager and similar portfolios, one with a performance fee in place and one without – namely Northern Venture Trust and Northern 2 VCT. The former, without a performance fee, has significantly outperformed the latter over ten years according to the AIC.*

Perversely Northern Trust decided to introduce a performance fee recently which a considerable number of shareholders voted against (21% Against), despite calling a General Meeting at short notice in the middle of summer.

ShareSoc has consistently opposed performance fees in investment trusts and other funds as we view them mainly as raising the management charges without a general improvement in relative performance. This was a course a theme in the Kay Review.

ShareSoc Chairman Roger Lawson made these comments: “When I was an inexperienced investor, I thought performance fees were a good idea. I swallowed the bait that argued that they aligned managers’ interests with those of investors and would encourage them to improve performance. But they simply do not work because the managers already have strong incentives to perform. After all in investment trusts they already have a fixed fee that is based on the size of the fund, so if fund performance is good, the fees go up. If the performance is poor, they also get fired. Incentive arrangements only work if the bonus that results is directly related to an individual’s effort and is rewarded within weeks (this is why they work when you are paying sales staff a commission). They do not work in investment trusts. Performance fees in general are simply a mechanism to pay the fund managers more money (rather like incentive schemes for directors which have led to a rapidly escalating rise in overall pay).

Standard Life UK Smaller Companies Investment Trust removed its performance fee last year and the Financial Times reported at the time that there was “a backlash from independent advisers and mounting evidence that their introduction has failed to lift returns for investors”. ShareSoc looks forward to seeing more trusts removing performance fees.

*Note: Total return of Northern Venture Trust was 303 over ten years, versus 176 for Northern 2 VCT, compared to an index of 100 as at 18/7/2013  – reported by the Association of Investment Companies (AIC)

For further information, please contact:

Roger W. Lawson,
Chairman, ShareSoc
Telephone: 020-8467-2686 

Or; Stan Grierson, ShareSoc
Telephone 01628-522514

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