A mindful approach to charges: Jeff Prestridge

29th March 2011

No one can accuse UK investment house JP Morgan Asset Management of standing still.

While other groups plod on doing what they have always have done for years – running long only equity portfolios – JPM continues to challenge the status quo.

In the last couple of years JPM has been waving the flag for absolute return funds – trusts that instead of concentrating on relative return attempt to deliver positive returns in all kinds of stock markets by investing in a broad spread of assets.

JPM Cautious Total Return, a £770 million fund, has done a half decent job of generating absolute return – 0.7 per cent over one year, 7 per cent over the past three years – although like many absolute return funds it has had its difficulties, most notably in the stock market crash of 2008.

Although there remains big unresolved issues over how absolute return funds are marketed, the idea of investment funds being used to generate returns akin to those from cash is one that is here to stay. Newton Real Return is now £3 billion in size while BlackRock UK Absolute Alpha is north of £2 billion. These funds are so big because they‘ve caught the imagination of financial advisers and private investors alike.

JPM  has also been attempting to stand up to the relentless march of low cost passive funds – exchange traded funds or unit trusts that track specific markets such as the FTSE All Share Index or specific indices.

Recently it radically overhauled its UK Active 350 fund, renaming it UK Active Index Plus and reducing the annual charges from 1.18 per cent to 0.4 per cent (with an element of performance that potentially could increase the annual charge to 0.55 per cent).

Rather than being marketed as a low cost active fund, UK Active Index Plus  is very much being sold as an alternative to a passive fund – a thinking man's passive fund alternative that rather than destined to underperform a chosen index is set up to outperform it (albeit by not much).

Major investment house Schroders has now followed in JPM's footsteps with the launch of its low-cost ‘alpha' funds – UK Core and QEP Global Core. Other groups, no doubt, will admire from the sidelines for a while and then come up with their own versions of low-cost active funds.

JPM is now busy promoting the virtues of investment trusts, something that hasn't been done since trade body the Association of Investment Trust Companies (now the Association of Investment Companies) launched the ‘ITS' campaign  in 1999. That campaign, involving TV advertising, fell by the wayside when the dot.com bubble burst and the split capital investment trust ‘scandal' suddenly reared its ugly head.

Although JPM hasn't resorted to the TV, it has produced a detailed paper on investment trusts entitled ‘the case for consideration'. The guide, written by David Barron, JPM's head of investment trusts, is targeted at financial advisers who have largely shunned investment trusts in the past because of the failure/refusal of funds to pay them commission.

 JPM now believes that with the imminent abolition of commission – a result of the impending implementation of the Retail Distribution Review – advisers will be increasingly drawn to investment trusts.

Of course, JPM's guide is a glowing advert for the virtues of investment trusts. But it makes a number of very good points which investors would be wise to remember. I will concentrate on just two.

First, 30 per cent of all investment trusts have total expense ratios (TERs) of less than one per cent a year. In other words, investment trusts are much cheaper than unit trusts where TERs are often closer to two per cent. More of your money is working for your benefit.

Secondly, 10 investment trusts have increased their dividend every year for more than 30 years – a result primarily of their right to squirrel away dividend income in the good years to top up dividend payments in the bad years when companies are struggling. Unit trusts do not possess this ability to squirrel away income.

I will leave you with this final thought. Over the past five years, Invesco Perpetual High Income has received big inflows from investors – primarily as a result of being recommended by a phalanx of financial advisers. The result is a £10 billion unit trust which levies an annual management charge of 1.5 per cent.

Over the same time period, Monks Investment Trust has plodded along, generating a mix of income and capital return from international stock markets. The trust is just over £1 billion in size, managed by Scottish investment house Baillie Gifford, and levies an annual management charge of just 0.45 per cent.

Guess which trust has delivered the best performance over the past five years? Of course, quaint little Monks.

It's time for you – as well as advisers – to get to grips with investment trusts. Visit theaic.co.uk and make yourself a better investor.

Jeff Prestridge is personal finance editor of the Financial Mail on Sunday. Follow him on Twitter @JeffPrestridge

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