Over on Monevator Moguls, we’ve been kicking the tyres on several investment trusts during the past year.
There was a big dislocation in the closed-end fund market when interest rates soared in 2022. Even the beloved ‘dividend heroes’ went cheap in the sales.
Elsewhere, infrastructure trusts that had previously traded on giddy 20% premiums to net assets (NAVs) fell to that level of discount. This 20% premium to 20% discount swing was independent of any move in their underlying assets. Some even reported rising NAVs!
Meanwhile you could drive a truck through the discounts on private equity and venture capital trusts. The most heavily-discounted traded at 40p on the (purported) £1 or less.
All told the average trust discount reached 19% last year – a level not seen since the financial crisis.
Even after a mini-rally, the average discount is still in double-digits.
Cheap for a reason(s)
So, fill your boots, active investors?
Well perhaps – with all due caveats. And assuming you’re a naughty type who understands the risks and hassles as well as any potential rewards.
But should you decide to wade into this Sturm und Drang intent on bagging a bargain, your favourite investing platform/broker may have other ideas.
The reason why harkens back to why some investment trusts may have sold off quite so severely.
99 problems and a glitch ain’t one
The woes of the investment trust sector is multi-factored if not omni-shambled.
The bear market of 2022 blew the trumpet on the start of the carnage as interest rates rose. The unloved UK market tossing everything into the bargain bin didn’t help either.
Investment trust discounts and premiums being buffeted around by supply, demand, and the emotional state of the market is nothing new.
But in this particular sell-off, trusts have also faced local turbulence that’s sent some into a tailspin.
For a start there’s the Consumer Duty regulations of 2023 that might make advisors more wary of exposing their clients to the extra complexities of investment trusts – and themselves to legal liability.
Wealth manager consolidation may also have forced the selling of certain trusts. It’s also left some trusts too small for the now-bigger managers to bother with.
Finally new-ish cost disclosure rules – derived from two pieces of legislation we retained after leaving the EU1 – seem to have been implemented in a particular obtuse way in the UK.
According to the investment trust industry, this has put trusts at an unfair disadvantage versus other kinds of funds.
How much?
On the latter point, even the House of Lords has criticised the way the Financial Conduct Authority (FCA) has implemented the cost disclosure requirements.
The Financial Times neatly summarises the situation:
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.
[For instance, in the accounts of the Temple Bar investment Trust] the ongoing charge – an expression of the company’s management fees and operating expenses – is 0.56%.
But if you look at the Key Information Document, devised by regulators to help investors make more informed investment decisions, the annual ‘cost impact on return’ is 1.48%; and if you exit after five years you’ll pay £712 in total on an example investment of £10,000 […]
These metrics are fine for open-ended fund fees, which deduct management fees when the daily unit price is updated.
But for investment trusts, fees and costs simply reduce the net asset value that an investor has a stake in by owning shares. Investors will also pay broker trading and stamp duty fees to own those shares.
The investment trust industry says the onerous cost disclosure regime has put off both retail and professional advisors, which has further weakened demand and driven discounts even wider.
Please sir, can I have some more?
The FCA acknowledges there’s a problem with cost disclosure. It’s apparently working on a long-term fix.
Indeed the potential for things to get better is another siren call that’s attracted me to the sector.
After all, one way to (try to) profit as an active investor is to head in the direction that everyone else is running from.
And if institutions are dumping assets for non-economic reasons then consider my interest piqued.
However to profit from any David vs Goliath heroics, we must be able to implement our cunning plans.
That is: we actually have to buy the things.
And that isn’t always easy when regulators and platforms are ‘protecting’ everyday investors from getting into some of the hairier trusts.
All’s fair in love and discounted investment trusts
For instance CityWire reported in April on how AJ Bell was restricting clients from buying shares in the investment trusts Chrysalis (ticker: CHRY; I hold) and Bluefield Solar Income (ticker: BSIF).
AJ Bell did this following ‘fail’ assessments in a fair value review conducted by its external consultant, 360 Fund Insight.
CityWire reports:
Investors could phone through a transaction and still pay the online charge of £5 rather than the normal phone fee of £25, a spokesperson for the firm said.
Customers of AJ Bell complained they had also been prevented from buying Digital 9 Infrastructure, Cordiant Digital Infrastructure, and Amedeo Air Four Plus after those too failed the assessment.
Investors are furious they are being prevented from buying closed-end funds trading on wide discounts that they regard as good value, and believe the low share prices offset any potential concerns over performance and costs.
And no wonder! What’s the point of enabling active investors to trade securities on your platform if you’re going to overrule their own assessment of value with one you prepared earlier?
I also don’t understand why clients could phone through orders, but not make the deals online? Perhaps a broker on the other end probes their suitability (or sanity). Better answers in the comments, please.
As for the ‘fair value’ issue though, this appears to be fallout from the Consumer Duty regulation I noted earlier.
Fair dealing
Platforms and brokers say Consumer Duty means they must alert customers who are at risk of poor returns and help them to make better decisions.
According to CityWire, price, performance, leverage and liquidity are all factors determining whether investment trusts are regarded as ‘fair value’.
However you don’t need to be Warren Buffett to understand those very same factors could make a trust potentially cheap, and be what’s attracted bargain hunters in the first place.
Moreover if I’ve got a longer time horizon than whoever sells me their shares – and/or if I’m happier to put up with liquidity issues or some other drawback – then my idea of ‘fair value’ may be legitimately different from a sellers’ – or even from a platform’s hired consultant.
The point of markets is that opinions differ. That is how we really do arrive at fair value.
It seems unlikely the legislation means to funnel everyone into a consensus-satisfying Nasdaq tracker fund – or whatever else is the winning investment du jour.
But a glib reading could suggest otherwise.
Set up to fail
AJ Bell is not alone in protecting investors from potential money-making opportunities. It’s happening all over the place.
For example the same CityWire article notes:
Hargreaves Lansdown has also restricted investors from buying Digital 9 Infrastructure, Cordiant Digital, and Amedeo Air Four Plus until they pass a questionnaire showing they have the understanding of ‘complex investments’.
While Cordiant and Amedeo are listed on the London Stock Exchange’s specialist fund segment, Digital 9 is not – though it is still viewed as ‘complex’.
Closer to home, Monevator Moguls member Mirror Man found a ‘Complex and Levered Product’ label being applied by Interactive Brokers to various investment trusts, hindering them from buying shares even in a giant trust like Brevan Howard’s £1.3bn BH Macro. (Ticker BHMG; I own).
In the Monevator comments, Mirror Man explained the platform won’t allow them to add to their existing holding of BH Macro, though it will let the shares be sold.
To buy more, Mirror Man must pass a test covering stuff such as ETNs, warrants, discount certificates, and leveraged ETFs, by answering questions like:
Assume a warrant on ABC share has a strike of EUR 40.00 and an exercise ratio of 0.1. The share is trading at EUR 45.00 and the warrant at EUR 0.70, resulting in a leverage of 6.4. If the share price were to increase to EUR 50.00 while the time value of the warrant remained constant, which of the following statements is true?
But I’m here to tell you nobody should need to be able to answer such questions to assess whether they should have money invested in BH Macro.
That’s because as a private investor, having such knowledge won’t help you judge the trust’s virtues – or otherwise.
What was the question again?
BH Macro is essentially a black box from the outside when it comes to the complexities of its trading models (though it does disclose plenty of other information in regular updates to the market).
Its fees are high, too.
These are two very good reasons to be cautious before investing in this trust.
In contrast, understanding how warrants are priced won’t help you assess the pros and cons. No more than I need to know how a jet engine is serviced in order for me to book the best flight to New York.
More relevant questions would focus on customer-specific issues. They might assess your general investing know-how, your level of experience in terms of time and range of investments, your capacity to take losses – and, crucially, your willingness to sign away any liability should losses occur.
Many readers will be familiar with the ‘sophisticated investor’ assessments sometimes required when investing into unlisted companies. Those seem to me more fit for purpose.
It’s behind a sign-up wall, but CityWire published the answers to a Hargreaves Lansdown questionnaire concerning complex products. This test – or at least the portion CityWire shared – does at least seem more in the ‘sophisticated investor’ vein than esoterica about trading instruments.
Anyway Hargreaves reportedly pushed back, saying that investors being able to access a cheat sheet could provoke the ire of the FCA.
So CityWire removed them but it left the quiz up, with heavy hints about how to answer.
Who is protecting who?
Why help Hargreaves’ customers get through their unasked-for homework?
I’d echo the CityWire journalists, who wrote:
We share the frustration of readers about the classification of some investment companies and trusts as ‘complex’, and the assumption that their investors need protecting.
The Financial Conduct Authority’s consumer duty rules require share-dealing platforms to flag ‘complex instruments’, which they can implement in their own way.
While Hargreaves requires you to pass the questionnaire, AJ Bell, Interactive Investor and Fidelity simply ask investors to certify that they are aware of the risks.
To my mind this cross-platform subjectivity is another unjustifiable aspect to the whole business.
It would be one thing if there were a centralised list of what trusts were in or out for retail investors. I’d still argue against such a mandate, but at least there’d be consistency.
But as things stand I can – and have – bought BH Macro on one of my platforms without any fuss, while arbitrarily Mirror Man cannot on theirs.
Does that seem right?
Of course being a person whose paranoia has me using half-a-dozen different platforms, I suppose in practice this ‘will they, won’t they?’ uncertainty works for me, compared to a blanket all-platform banning from on high.
That’s because I can usually find what I want with one of my brokers.
Nevertheless a simple approved list of trusts would be more logical. The current approach smacks of platforms playing chicken – if not arse-covering.
When you come at the king…
Talking of illogical, last summer even saw Fidelity suspend investments into RIT Capital Partners (ticker: RCP, and yes I hold). This is the OG granddaddy of wealth-preserving investment trusts – hitherto seen as a prudent place for middle-aged duffers to park the proceeds from daddy’s estate sale.
True, RIT has struggled recently as the market has become wary about unlisted holdings. RIT has a chunky (and hitherto profitable) allocation to private companies, and its discount blew out to near-30%.
But again, should platforms be assessing the risks and rewards on offer with such a security? Let alone trying to assess via questionnaires whether their customers could do the job of investment trust employees should the latter come down with the lurgy?
As Mirror Man said in their comments: “I want my broker to provide me with a service (order execution), not masquerade as a financial regulator.”
As things stand it’s possible that by making it harder to invest in trusts, platforms are exacerbating the discounts, given that everyday retail investors are the natural buyers of a trust like RIT Capital.
Passive aggressive
Incidentally, any passive investors who made it this far might be thinking it’s all another reason they’re best out of active investments (which most will be).
Yet the very same regulations also prevent you from buying most US-listed ETFs on the UK platforms.
I know there are ways around this, such as if the ETF has issued a Key Information Document (KID).
Individuals who can declare themselves as professional investors can buy non-UCITS ETFs, too.
But again, anyone can happily buy thousands of other US assets – in ISAs and SIPPs even. Dodgy meme stocks are no problem. Is restricting access to (sometimes larger and cheaper) US ETFs really logical?
Happily it seems the regulator is having second thoughts about this one.
From ETF Stream:
ETFs domiciled in the US could be granted equivalence under the UK government’s Overseas Fund Regime in a move that would open the market to US-listed ETFs.
The Financial Conduct Authority launched a consultation with asset managers last December on how products should be recognised under the post-Brexit framework.
The UK government granted equivalence for all UCITS vehicles in the European Economic Area (EEA) in January, with US-listed ‘40 Act’ ETFs also being considered.
Any move would need to be approved by the UK Treasury deeming the regulatory regime for the overseas fund to be equivalent to the UK.
US-listed ETFs are not currently available for sale under EU law as they do not publish certain documents required by the European and Securities Markets Association.
Finally, potentially, a Brexit benefit!
It’d be a win-win for all of us.
Who’d be a regulator?
Honestly I do have sympathy for the regulators – and for the platforms trying to keep up with them.
And I fully understand the push to make the financial services sector one where service is more for the benefit of customers than for employees.
The disinfecting sunlight cast upon high-fee financial advisors in recent months is overdue, for example.
On the other hand, regulators shouldn’t stop people who know what they’re doing – or who are willing to accept the consequences anyway – from spending their money as they see fit.
And I think the same should hold for over-zealous and/or over-cautious platforms interpreting how the regulatory wind is blowing.
Consider the FCA’s semi-reversal on Bitcoin ETFs – vehicles now running perfectly smoothly in the US.
The FCA’s revised position is:
These products would be available for professional investors, such as investment firms and credit institutions authorised or regulated to operate in financial markets only.
But is barring access to Bitcoin ETFs the best way to protect retail investors?
Think about the long history of crypto platforms being looted or otherwise falling over. The booms and busts of alt-coins. The legions of crypto grifters pumping and dumping daily across social media.
Not to mention the mishaps that can occur when people attempt self-custody of their own crypto assets – including sending millions of pounds worth of crypto to landfill.
There are even micro-cap Bitcoin miners listed on the AIM market which are freely available for trading.
You can have at all those, no problemo. But apparently only professionals can be trusted to put £1,000 into a bog-standard Bitcoin ETF.
The fault is in ourselves
Running a blog about personal finance and investing, I see all the scammers and shysters.
Indeed I spend the best part of an hour every day wading through their spam in the Monevator comments and email.
Also, for better or worse our society has moved towards a compensation culture.
Many people now expect to be bailed-out when their decisions don’t work out – but left well alone when they do. It’s hard to square.
So regulators and platforms surely have a difficult time of it.
Still, given all the straight-up larceny around, I don’t see that restricting informed and hands-on investors from buying shares in legitimate companies should be any regulator’s top-priority.
Investment trusts have a duty as listed businesses to accurately report their activities to investors. All information properly required should be made available. And platforms should flag it where appropriate.
Fine – if we must have a checkbox with links to the downside and the risk of ruin then on our heads be it.
Companies shouldn’t lie to us or wantonly mis-sell products. Regulators can valuably tackle those issues.
But frankly, if after being given the relevant data somebody wants to invest their money with a legal but ‘reassuringly’ expensive high-fee advisor say – perhaps because they like glossy brochures and feeling special – then that’s their business as far as I’m concerned.
And given that, I obviously believe we should also be able to buy whatever (legal) securities we want.
Regulation versus prohibition
If after being given the appropriate warnings I want to buy a triple-levered ETF shorting the Nasdaq then let me.
Just like if I want to buy a value pack of ten beers and 40 fags for the evening.
It’s not advisable, but it’s my choice.
I’m not making some specious point here about enabling UK investor’s money to ‘support the London Stock Exchange’ or ‘channeling money into productive investment’.
I just think it’s a matter of basic morality and freedom in a capitalist system.
Sure, have gatekeepers for mainstream products.
But don’t let them become wardens hampering the minority of us engaged investors who actually do our research – and who are ready to live with the consequences.
What do you say readers? How would you regulate if you were given the awkward chalice? Let us know in the comments below.
- Mifid (Markets in Financial Instruments Directive) and PRIIPS (Packaged Retail Investment and Insurance-based Products [↩]
Fascinating. How does such a wide discount survive in the real world?
In a previous life I was a money market and fx trader and 20bps margins disappeared in the 1980s and shrunk to next to nothing.
“Meanwhile you could drive a truck through the discounts on private equity and venture capital trusts. The most heavily-discounted traded at 40p on the (purported) £1 or less.” I’m suspicious the only explanation I can think of is that you can’t trust the valuations of private equity or venture capital or am I missing something?
Some of the infrastructure trusts are essentially diversified industrial conglomerates, Cordiant is a good example – it holds several operating companies across several countries. Ditto 3I, PINT etc.. There is an element of the centre (the trust) helping / chivvying / putting a rocket under the operating companies as needed. It is not that different from the old Melrose model – although that was not a trust. There SHOULD be a lot more management effort and central costs for that sort of situation versus a trust or fund that just holds quoted shares. Similar position for renewables trusts, REITs and PE trusts. That doesn’t seem to be recognised by FCA , AJB etc.
(If the Trust centre doesn’t put the effort in , then may end up like HOME REIT… )
Further,
I was in the position described with AJB. Had a quite long discussion with one of their staff, and asked for a copy of the Fair Value Assessment Report – it is all very well saying (eg) CORD is not “fair value” – but let me know on what basis – is there something that I have missed. Is is costs, is it some other factor ? They haven’t sent the Report yet….
I also pointed out that AJB have implicitly approved all my other holdings as being “fair value” or better, and as such I’ll be very peeved if any of them turn out to under-perform & maybe I’ll come back with a claim 🙂 . They have given Advice & this isn’t execution-only any more.
Good piece, thanks.
One of those topics best wrangled over a few pints, I suspect, but here’s some off-the-cuff thoughts.
Yes, generally I think adults should be free to do what they want within reason, if it doesn’t affect others, so think we should be allowed to buy most Fin products. I suppose the chaser would be: as long as there aren’t aggressive ‘game-ified’ advertisements encouraging them to do it. Though while ITs are restricted from many, apparently CFDs are not a problem on platforms like IG & Plus500? And bookmakers remain OK? It does seem rather a double-standard?
And presumably the difficulties of buying them has contributed to the increasing discounts? My belief is that most ITs can only continue with the support of Retail investors. The continuing consolidation & growing size of Wealth Managers (e.g Permira with Tilney/S&W etc.) means that most ITs are too small for them now.
US-listed ETFs – yes, there are some that would be helpful. BUT… you also have to make sure you really hammer home the tax implications of most of them i.e. Income tax payable on Capital Gains of non-UK Reporting ETFs (which most US-listed ones are). And in my experience a fair few tax accountants don’t really understand this sort of stuff, let alone investors.
Separately, BHMG is a puzzle. Amazing in 2007-09. Not much cop 2010-18. 2018-22 pretty blistering. Then performance tails off, combined with a massive re-rating from premium to discount. Was that just because of the fears of the big sell-off following the Wealth Manager merger? Or because animal spirits returned in 2023 & a diversifier was less appealing? And why the performance problems. I mean, it’s not disastrous, but even in the 10s the NAV was pretty flat, and rarely down. Are the traders enjoying their recent pay days too much and aren’t hungry any more? Have they been lured to competitors? Is Alan Howard distracted by his new-ish young wife? Though Landy seems to be in charge & has been doing a good job. Many questions – any answers or thoughts would be enjoyed.
And thanks for providing the forum to raise this stuff.
@mark — You write:
A cheeky but interesting point. If the platforms were applying a blanket no-go from the FCA to the same set of trusts, no discretion would be involved. As it is platforms would seem to be implicitly putting forward some trusts over others. I doubt anyone could make anything of it in court (and I generally abhor that sort of thing) but it does highlight the inconsistencies.
@tom_grlla — Great comment, thanks, especially the good points about US ETFs. As for BH Macro, you’re not a Mogul member? Et tu, Tom? 😉 We did a deep dive on it over there, with excellent follow-up comments from @ZXSpectrum48K and @DeltaHedge among others. I’ll just add (a) it was really perturbed by the US teeny-banking-crisis last March, like most macro funds, and (b) besides your other valid points it also did a big issuance at a premium in early 2023 that may have produced some sort of overhang I guess, given the subsequent NAV challenges.
Other reasons I can think of can be pondered by Moguls…
I haven’t experienced any grief buying ITs of late (using iWeb) though it has been adding to holdings I already have. Including RCP earlier this year. But with regulatory CYA crap doesn’t usually account for ‘I already hold this’, I still gotta tick the I have read the key facts.
I’d add the National Lottery to tom_grlla’s litany of gambling advertised/pushed on the general public, how that was ever allowed in the first place beats me, a tax on poor people’s dreams to fund middle class ‘good causes’. Ticking the box ‘past performance…’ to buy investments compared to buying a chance where you have a better risk of being killed by lightning than finding out it could be you and really was should come with major ‘do you really want to do this’ paperwork.
“It seems unlikely the legislation means to funnel everyone into a consensus-satisfying […] tracker fund”
Intended or not (IMO it probably is), this is exactly what Consumer Duty will do, because if IFAs and platforms push all their clients towards the same low-cost trackers that everyone else is invested in, it’s harder to complain that they weren’t trying to give their clients a “good outcome”.
Of course, if trackers underperform for the next decade, there will be a tsunami of compensation claims that the FCA will happily pursue.
Unfortunately, this is the natural consequence of nudge economics, where the anointed ones get to decide what’s best for us plebs, whether it’s booze, fags, sugar, high-risk investments or anything else that makes life interesting.
This is just one end result of the over regulation of financial services since 2008. The pendulum went too far one way into 2008 and now it’s gone too far the other. It’s done real harm by pretending to offer consumers protection where no protection can be provided. It’s wasted so much time and money.
These increased regulatory costs get passed straight through to customers. Those costs reduce choice for customers by forcing smaller boutique financial services companies to merge with larger ones. We are left with a small number of identikit companies offering the same lowest common denominator products. The companies justified fear of regulators and legal attacks means companies now force their customers to jump through hoops to self-certify. Or they simply don’t allow them to deal in “complex” products, where “complex” is typically defined in a totally illogical way by some guy at the FCA who doesn’t understand anything about those products.
Has it increased the protection for those customers? Not one iota. Will it stop the next financial crisis. Not a chance. SFA failed, FSA failed, FCA failed.
We need to move the needle back to a more caveat emptor approach. Less regulation. More freedom to invest and speculate how ever you want. But also no compensation culture and no socialization of losses.
Going back a while, Halifax wanted me to fill in a sophisticated investor statement….to allow investment in a physical gold ETC.
As ever a brilliant article @TI.
I can’t find anything to disagree with 😉 and the only point of (perhaps) slight variance of my view as compared with yours here is maybe my violin for the fund platforms would be still smaller.
HL makes a 65% profit margin and, at its ‘full on’ OEIC fee of 0.45% p.a. on the first £250k and 0.25% p.a. on the next £750k, it would take off £3,000 p.a. on a £1 mln holding of open end funds; but in contrast would only take £45 p.a. (in an ISA) or £200 p.a. (in a SIPP) for holding the same value of ITs.
That’s a really big disparity, and it gives very little incentive to any platform to take an equally critical approach to customer value for money and risk to consumers with (actively managed) OEICs as compared with ITs.
And I think that I may perhaps be right in saying that HL have never previously promoted ITs (although ii definitely do so).
As for the US ETF unavailability situation, I could rant here, but I prefer to just weep inside 🙁 .
There’s some genuinely potentially useful and maybe even risk mitigating ‘return stacked’ tracker ETFs launched State side (RSSB, RSST, RSBT, NTSI, NTSE, NTSX). It’s beyond frustrating not being able to buy them. How it can be thought OK to allow retail investors to access 3x and 5x LETFs with daily resets on highly volatile individual stocks and commodities, but not 1.5x a standard 60/40 balanced portfolio of global stocks and intermediate bonds (using monthly managed futures for the bonds, and full physical replication for the equities) just makes no sense IMO.
Good post.
Had to fill in a questionnaire to invest in some short term GBP liquidity ETFs recently, which are only marginally riskier than a savings account.
As noted in the post and comments, this stems from modern compensation culture. Covers not just investments, but moving cash, and is expanding into gambling. Ad absurdum: eventually the FCA will just take control of all your investments and cash and dispense a small allowance to show their generosity while keeping you safe :P.
Glad they are looking at allowing access to the cheaper, more liquid, more diverse US ETFs, hope it goes through. There are a few brokers that allow you to open US based accounts as a work around to the professional investor accreditation requirement needed otherwise.
Access to US ETFS (mostly in a SIPP, for dividend WHT reasons) would indeed be a game changer. As @Delta Hedge points out the low-cost, mildly leveraged ETFs, like RSST are a game changer, and it’s painful that I can only hold in one out of the handful of SIPPS I manage.
Thanks, @TI – yes, had forgotten about the Silicon Valley bank meltdown last year & badly-timed issuance. And thanks for the Moguls prompt. I haven’t been checking in here so often of late, but feel like the value you have provided is def worth at least a 1 year sub, so look out! I look forward to the BHMG dive – doubtless stuff I missed out on.
Ermine – I LOVE iWeb for Funds, though there are a few omissions, but drives me bonkers that they expect you to pay for Limit orders that aren’t executed. Feels fairly basic.
@tom_grlla — Ah, cheers for taking my gentle ribbing in the spirt it was intended, and delighted to have you joining our club — thanks for joining! Hope you like it and stick around! 🙂
Here’s the BHMG piece:
https://monevator.com/and-now-for-something-completely-different-members/
Wow, I feel honoured to be name-checked in a Monevator article, but I also have to tip my hat to Delta Hedge, who I think kicked-off the discussion under one of the Mogul pieces. @TI – you’ve done an excellent job of dissecting this fiasco and I think you’ve covered all possible angles in this piece. What frustrates me the most is the heavy-handedness in the way that these “protections” are being applied by the brokers. IB explained to me that a line about “active leveraged trading” in the KID for BHMG is the reason why it’s been classified as a complex and leveraged product (CLP). So it’s probably the gearing used by Investment Trusts, which they have to declare in the KID, that is causing them to be lumped in with leveraged ETFs and exotic derivatives. IB also informed me that their Risk Management arm has it’s own “black box determination” regarding which instruments qualify as CLPs, so there is no transparency and zero room for negotiation. I now purchase BHMG through a different broker that does not place any restriction whatsoever on purchasing this stock. It’s all such nonsense.
A thought experiment prompted by the sad news of Jim Simons’ passing.
Imagine for a moment (suspending understandable disbelief here) that Ren Tech went and made Medallion available in the UK to everyday retail investors.
What then would the FCA and the fund platforms say if you actually tried to invest in it?
They’d say, “no, you can’t do that”, and that Medallion is just too ‘risky’ and/or unsuitable because Ren Tech:
– won’t publish any of it’s algorithms, notwithstanding that Medallion takes minimal net risk, as evidenced by its amazing Sharpe, Sortino, and Gain to Pain ratios; by its MAR and Ulcer index.
– uses around 12.5x leverage in the fund, notwithstanding that it’s the fund’s ability to use leverage almost without any risk which turns the 50.75% win rate across Medallion’s 7,000 uncorrelated positions (with an average 1% daily volatility) from a 0.015% daily return, which is just 4% annualised over 250 trading days p.a., into an astounding 62% annual return before the fund charges in fees.
– charges unacceptably high fees, even though, after the full 49% taken in all fees, the fund has still beaten everyone, even Berkshire Hathaway included, hands down over the full 35 years that the fund has operated since 1988.
Basically the FCA and the fund platforms would, in this hypothetical, be stopping investors from taking what would probably turn out to be the best asset allocation decision that they could ever make.
And yet the FCA and the fund platforms had no problems at all (I’m sorry to bang on about this point, but it’s a not wholly fanciful comparison) when Woodford decided to try his hand at something completely different to anything that he’d ever had experience of before and to invest into non dividend paying nano and micro cap shares and into unlisted, early stage, profitless ventures. No sense back then that maybe it was worth putting out a warning note for potential investors – i.e. perhaps something along the lines/gist of ‘do feel free to invest into WEIF and/or WPCT, but do please be aware, before doing so, that this fund manager, notwithstanding his success with his previous investing style, is now doing something that’s largely incomparable to and distinctive from everything he’s done before, and it may or may not work out; but in either event his previous track record isn’t going to be particularly relevant”.
I do feel the FCA and fund platforms like HL have minimal credibility now in making out that they can second guess ordinary investment risk. ITs have been around since the 1860s. RCP has been going for decades. There’s nothing novel or especially concerning about most of them.
Granted there are some ‘specialty’ ITs in niche and new areas where caution is advised and maybe the FCA and/or the fund platforms should/could put out a warning for those particular ones.
But when the FCA and platforms start coming down hard on pretty plain vanilla established multi asset ITs like RCP I can’t help feeling that they’ve started to lose the plot.
The “reassuringly expensive” line reminded me of a piece in AJ Bell’s Shares Magazine in September 2022: “Could BH Macro be the ‘reassuringly expensive’ Stella Artois of hedge fund trusts?” insinuating that it was a good idea for [retail] investors to buy at the then 15% premium to NAV. AJ Bell got amazingly close to calling the top – from there BHMG steadily declined to a >20% discount, and with that the share price took a similar dive.
So when AJB’s research now says that certain IT’s are terrible value, that’s a clear buy signal.
(More seriously, they should share their analysis and then let customers make their own decision.)
Suggestion from the FT here (25 April 2024) that FCA equivalence recognition (and with it approval, de facto or de jure) for US ETFs might not be too far off:
https://www.ft.com/content/d70e7fca-a935-43eb-9405-4f317161d265
We will all be moving our ISAs and SIPPs to Charles Schwab if the FCA does the right thing or will the dinosaurs like HL get their acts together and make US ETFs an easily accessible part of their offerings too?
There will be the practical issue if US ETFs are approved for sale in the UK of FX fees. I’m not paying a 0.25%+ commission rate on hundreds of thousands of sterling in order to buy $. That’s a taking the Mickey rate. So it might be a case of how to move to IBkrs to get FX for 0.03%.
Happy to say that AJ Bell has reviewed its stance towards some of these trusts.
As CityWire reported yesterday:
The share-dealing platform today told customers holding Bluefield Solar Income (BSIF), Chrysalis Investments (CHRY) or Cordiant Digital Infrastructure that after discussions with the funds’ managers, it had changed the assessment criteria used by external consultant 360 Fund Insight, which conducted the reviews on behalf of the broker.
In an email to fund groups and investors, AJ Bell said that after seeing managers’ own assessments of value, and discussions with them and 360, it had changed the assessment rubric.
‘Based on this and discussions we’ve had with the fund manager and 360 Fund Insight, we have changed some of the criteria we use to assess value and this has resulted in the investment being assessed as providing fair value,’ one email to a Bluefield investor said.
This means AJ Bell’s customers can buy and sell the closed-end funds as before.
https://citywire.com/investment-trust-insider/news/aj-bell-lifts-fair-value-bans-after-funds-protest/a2443534