How investment trusts are cutting costs and delivering better value for money - J.P. Morgan Asset Management

How investment trusts are cutting costs and delivering better value for money

Contributor Ian Cowie


You don’t need to let a robot run your money to obtain low-cost fund management. Some actively-managed investment trusts cost less than some index-tracking passive funds.

Cost-conscious investors seeking value for money from professional fund managers should consider leading investment trusts. After recent announcements about reductions in fees, active stock selection need not cost any more than passive index-tracking.

For example, JPMorgan American Investment Trust has said that from October, 2017, it will cut its annual charge by more than a third from 0.52% to 0.33%. This will take the form of tiered fees on the £1.05bn trust, starting at 0.35% on the first £500m assets under management.

That is substantially less than the 1% per annum charged by one of Britain’s biggest index-tracking funds, which passively replicate a stock market index, rather than attempting to identify value or profit opportunities (Virgin FTSE All Share Tracker Fund, July 2017).

How to make more of your money

There is no particular magic to fund management, the more of your money that sticks to the fund managers’ shovel, the less will be left to work for your benefit. Higher management charges can reduce investor returns. Even apparently small differences in annual fees can have a big impact on medium to long-term investor returns because of the way compounding works.

As a result of rising concerns about costs, the Financial Conduct Authority (FCA), the chief City watchdog, has investigated the asset management industry and called on fund managers to offer better value for money (1). Interestingly, its recent final report rejected the idea that passive index-tracking funds necessarily offer better value than active professionally managed funds. The FCA report said: One point raised in the feedback, which we want to address, was a perception that our interim findings suggested that passive funds were preferable to active funds. This is not the case. Rather than focusing on one strategy over another, we think it is important that investors understand both the total cost of investing and the objectives of the fund or mandate they are investing in, so that they can choose the product that best meets their needs. (2)

Good news about better value fund management

Fortunately for investors seeking value for money, several leading investment trusts have already cut management costs or scrapped performance-related fees for fund managers. For example, earlier this year JPMorgan US Smaller Companies and Mercantile investment trusts both reduced their annual charges and JPMorgan Claverhouse and JPMorgan Brazil investment trusts both scrapped performance fees.

Several leading investment trusts have already cut management costs or scrapped performance-related fees for fund manager.


A total of eight J.P. Morgan investment trusts now have tiered fees – including JPMorgan European Smaller Companies and JPMorgan Japan Smaller Companies, which introduced these structures in 2017 – with the aim of providing better value to shareholders through fair fund management charges. After all, it doesn’t cost twice as much to manage a £1bn fund as it costs to run a £500m fund and J.P. Morgan Asset Management aims to ensure that shareholders benefit from economies of scale to obtain value for money.

Paying less for more

It’s worth considering the detail of tiered fees and how these can deliver better value for investors in the form of lower cash costs for professional fund management. For example, with effect from October, 2017, JPMorgan American Investment Trust will charge 0.35% on the first £500m of net assets under management; 0.3% on net assets in excess of £500m up to £1bn; and 0.25% on net asset above £1bn.

At a headline level, the effect is to reduce the annual charge on this £1.05bn trust by more than a third from 0.52% to 0.33%. For individual investors, this will produce valuable cost reductions. For example, if you had bought £10,000 of net asset value (NAV) in this investment trust in 2006, the reduction in fees would give an investor an extra £470 of NAV by December, 2016. That is, lower costs on high quality fund management would have increased total NAV returns from £31,280 to £31,750.
No wonder the chairman of JPMorgan American Investment Trust, Dr. Kevin Carter said:

“We believe strongly that this new fee structure allows the Company to retain its competitive position against Exchange Traded Funds (‘ETFs’)… JPMorgan American Investment Trust offers investors a sound investment approach subject to independent and robust oversight by its Board.”

“The new investment management fee arrangement takes into account our obligations to the Company’s shareholders to ensure they receive good value and sensible investment management in a changing world.”

Independent director drive value for investors

An important difference between investment trusts and other forms of pooled fund, such as unit trusts or open-ended investment companies (OEICs) and ETFs, is that investment trusts have independent boards of directors. These directors’ duties include representing the interests of investors, or shareholders in these trusts, even where their financial best interests may diverge from the fund managers’ interests.

One area where investors’ interests and fund managers’ interests may diverge is fund management costs. All other things being equal, investors will want lower costs and fund managers would like to be paid more. This potential conflict of interests has led the FCA to consult on “strengthening the duty on fund managers to act in the best interests of investors” (3). However, it has not proposed requiring unit trusts, OEICs or ETFs to have independent directors.

Fortunately for shareholders in leading investment trusts, there is already plenty of evidence of independent boards of directors representing investors’ interests to drive costs down. For example, since January, 2016, JPMorgan US Smaller Companies Investment Trust reduced its base fee by a fifth from 1.2% on assets up to £100m to 1% per annum on all assets. Similarly, since July, 2016, JPMorgan Brazil and JPMorgan Claverhouse investment trusts have removed performance fees and, in the former case, capped total expenses at 2% and, in the latter case, reset base fees at 0.6% per annum on the first £500m assets under management and 0.5% on any net assets above £500m.

More recently, since the start of 2017, JPMorgan European Smaller Companies and JPMorgan Japan Smaller Companies investment trusts have both introduced tiered fees. In the first case, fees are 1% on assets up to £400m and 0.85% above. In the second case, fees are 1% on assets up to £150m and 0.8% beyond that. Looking to the future, the board of Mercantile Investment Trust has said it will reduce its base fee from 0.475% of its stock market capitalisation to 0.45% with effect from February, 2018. The variety of these charges and their shared downward trend demonstrates the independence of their boards of directors and the valuable role they play in obtaining value for money for shareholders.

Change is already on the way

Investors who are more interested in building their own retirement fund than contributing toward another plate glass palace in the City of London need to keep a keen eye on fund management costs. No wonder the Financial Conduct Authority watchdog is barking about high costs and low returns in some parts of the Square Mile..

Fortunately for investors seeking value for money, several leading investment trusts have already cut costs, scrapped performance fees and introduced tiered charges. The latter change might sound like a technical detail but, because it does not cost twice as much to run a £1bn fund as it does to run a £500m fund, it is important to share economies of scale with shareholders.

Even apparently small reductions in annual costs can add up to big increases in returns to investors over the medium to long term. If you select funds that offer fair value to investors, you can enjoy active stock selection here in the United Kingdom and overseas for less than the cost of some of Britain’s biggest passive index-tracking funds.

Note 1: FCA Asset Management Market study June 2017

Note 2: ibid. Page 4, par 1.7

Note 3: FCA Asset Management Market Study, Final Report, page 8, par 1.37

Related Products

JPMorgan American Investment Trust plc  

JPMorgan US Smaller Companies Investment Trust  

JPMorgan Claverhouse Investment Trust  

JPMorgan Brazil Investment Trust  

JPMorgan European Smaller Companies Investment Trust  

JPMorgan Japan Smaller Companies Trust  

The Mercantile Investment Trust  

Important information

Investors should remember that share prices can fall without warning and that you may get back less than you invest. Investment trusts seek to diminish the risk inherent in stock markets by diversification and professional fund management, whilst bearing in mind that the portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk and that diversification does not guarantee investment returns and does not eliminate the risk of loss. There are hundreds of investment trusts to choose from. For more details see the Association of Investment Companies.

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