Key Information: picture of a single key against a black background, Photo by Matt Artz on Unsplash

Key Information I’d Like To See

There’s been a lot of controversy over the recent introduction of Key Information Documents (KIDs) for investment trusts. In theory, they are designed to standardise the basic fund information that’s available for ordinary investors like you and me. In practice, they’re a bit rubbish.

KIDs have only been with us since January 2018, so they are still very much work in progress and many private investors might not be too familiar with them.

Typically a KID will run to 3 pages and it can usually be found in the remotest corner of an investment trust’s website. Here’s an example of one from Caledonia Investments if you want to take a peek. It’s an exhilarating read, I’m sure you’ll agree!

Nerd corner: KIDs only apply to investment trusts right now, I believe. Other types of fund are required to produce something similar called Key Investor Information Documents (KIIDs) — note the extra ‘I’ — however, they will also have to produce KIDs instead from the end of 2019.

KIDs start off well enough, with sections of what the trust is intended to do and who the target investor is. The language could certainly be simplified, though.

Then it all goes a bit pear-shaped when you get to the sections on risk, possible performance ranges under various scenarios, and costs.

For example, the Caledonia KID tells us that the 1-year returns could vary from -58% under a ‘Stress’ scenario to +35% under a ‘Favourable’ scenario. Very useful!

What these scenarios entail isn’t really explained, although that’s not Caledonia’s fault as they are merely following what the legislation requires.

Standardisation isn’t easy

According to a recent FCA review some “financial advisers [are] recommending that advised clients largely ignore the information contained within”. That’s not exactly inspiring.

While the KID is a well-meaning piece of information, it’s exposed the can of worms you can face whenever you try and standardise information for a diverse group of products and end users.

In the cost section, for example, there seems to be a lot of confusion about how transaction charges should be calculated. Many trusts have negative figures, which is clearly nonsense. The FCA thinks this is down to confusion over what format the calculations should take and it is seeking to educate companies to address this.

And many trusts invest in other funds, and they, in turn, could invest in different funds. All these funds have their own costs, so should you include all of them as well?

The FCA said there was “a lack of clarity as to which products require a look-through and how many layers of vehicles a manager should look-through for fund-of-funds. It has been reported to us that some managers only look at the first level, while others go further”.

This seems to be one of the primary reasons why the costs you see in a KID are so much higher than the standard ongoing charges figures.

What I’d like to see

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In the spirit of sticking my oar in being constructive, I’ve been thinking about what I’d like to see in a key information document. So, I’ve scribbled down many of the things I like to review when choosing an investment trust.

At the risk of information overload, here goes…

1. Investment aim

A few short paragraphs on what the fund is aiming to do (including any formally stated total return or dividend targets) plus a note of any major changes made in the last decade.

2. Basic fund information

There’s a mish-mash here and I’m sure I could add a few more :

  • when the fund was originally listed;
  • ticker and other stock identifiers, e.g. ISIN, SEDOL;
  • what currency it trades in and pays dividends in;
  • where it’s based (either UK or offshore);
  • what AIC sector is it included in?
  • any previous names it’s had;
  • how many shares it has and its market capitalisation;
  • average number/value of shares traded each month;
  • typical bid/offer spread;
  • the average discount/premium over the last year and five years;
  • average gearing over the last year and five years;
  • policy on buying back shares or issuing new ones;
  • does it have a savings or dividend reinvestment scheme and what do they cost; and
  • which company manages the trust and how long they have done so.

3. The fund manager

When I’m researching an investment trust, I like to find out a little bit about who is making the decisions:

  • who is the lead individual, how old they are, a summary of their experience, and how long have they been in charge;
  • do they have a deputy and/or support team;
  • what’s the succession plan;
  • what other funds is the lead individual responsible for and how much of their time is devoted to this particular investment trust; and
  • who were the previous individual managers, if any, over the last 25 years.

4. Performance stats

We’re all aware that past performance is often not a great guide to future returns, but it still provides a useful frame of reference.

It would be good to see total performance statistics for the last 25 years and to see that split into five-year periods as well. And to be greedy, let’s have these both in share price and net asset value terms.

We could do with some benchmark comparisons as well, so the fund’s chosen measure plus both UK and global markets as a broader reference point as well.

OK, 25 years is really wishful thinking, but it’s a great way to emphasise the long-term nature we should have when investing.

In an ideal world, I would like to see performance since the trust was launched. That could be a bit tricky for those that date back to the 19th century of course!

5. Portfolio details

Digging down even more into the weeds now:

  • what’s the investing universe, e.g. UK-listed companies valued over £1bn;
  • is there any ethical policy followed, e.g. sectors the fund does not invest in;
  • does the manager actively engage with management and how have they voted on recent key resolutions:
  • breakdown of the current portfolio by classes of investment if appropriate, e.g. by industry, geographically or by asset class;
  • the typical number of positions held;
  • percentage represented by the top ten and top twenty positions;
  • percentage of the portfolio by value bought/sold last year and the average for the last five years;
  • breakdown of positions/value by years held, e.g. less than 1 year, 1 to 3 years etc; and
  • any policy on position sizing, e.g. maximum limits, typical starting positions.

6. Costs

I’ve definitely got the feeling that many fund management companies just phone it in when it comes to the cost section, lumping everything under one heading.

Let’s go to the other extreme then. I’d want to see the following both in absolute (i.e. pounds) and percentage terms:

  • directors’ fees;
  • fund management fees (separated into basic and performance elements if necessary, plus an explanation of any tiered levels);
  • trading costs (fees paid out in cash plus the spread suffered whenever an investment is bought or sold);
  • administration fees paid to custodians, registrars, auditors, lawyers etc;
  • interest costs (and a quick note on what borrowing facilities the trust has);
  • fees charged by any underlying funds (difficult this one, perhaps an estimate of the percentage invested in funds by these underlying funds to give a feel for how deep the rabbit hole goes);
  • fees paid for ‘carried interest’ by the likes of private equity funds, plus an explanation of how these are calculated.

I think any category that comes to more than, say, 0.25% of net asset value needs a detailed breakdown of how it is been derived. That might mean analysing the carried interest figure by individual investments.

That might seem extreme, but it’s my money being extracted, so I want to know the full details thank you very much.

The figures for all these should be included for each of the last five years, to get a feel for how they are moving over time. My thinking here is that items like performance fees and carried interest can be lumpy from year to year.

Over to you

There’s a cost to preparing information like this, especially the first time it’s done. But I think it’s the sort of information any half-decent investment trust should have to hand. A lot of already exists in either the annual report or the AIC website of course.

Perhaps there could be a high-level summary version and a more detailed one, to reduce the risk of putting people off by a blizzard of figures.

My list isn’t exhaustive by any means. I’d be interested to hear of any data points you, dear readers, look at. So please fire away in the comment section below…

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8 Replies to “Key Information I’d Like To See”

  1. On costs, there’s no difference in running a fund of £250m or one of £2bn. It’s the same work involved, the same reports, accounts, annual general meeting etc. etc.

    Yet the industry refuses to move away from percentage charging. I say let’s have an industry prescribed ‘Cost to Run the Trust’ figure of £XXX which is a flat fee that pays for everything including the portfolio manager. It would then be up to the trust’s directors to justify why they are paying extra.

    This would only work for trusts that invest in listed equities, as there’s no more work selling £1m share investment than selling £100m. So this wouldn’t work for say REITs or Private Equity trusts as the work of the manager could be quite different depending on the assets owned.

  2. H. Jones says:

    Thanks ITinvestor for this interesting article ‘Key Information I’d Like To See’ posted on 04.04.2019.

    My take on KIDs and lack of compliance with cost disclosure.

    Unfortunately there are inconsistencies and lack of application of regulation (Packaged Retail and Insurance-based Investment Products (PRIIPs). For example, take RIT capital partners (they are not alone and I found many other examples of ITs where there are glaring inconsistencies of the type discussed below) in the RIT capital partners KID document the total costs (impact on return) is reported as being 4.17. However, Fidelity and Interactive Investor platforms both quote OCF’s figures of 1.02. This is a big difference and contrasts strongly with Charles Stanley Direct which quotes on their own website an OCF figure of 4.17 (the same figure that is found in the KID document).

    I have just done some quick calculations using a realistic 10% annualised growth (dividends reinvested) over a 10 year period for RIT capital partners and compared the performance with Fidelity index fund P that tracks the MSCI world index. In fact, Fidelity index fund P (with an OCF value of 0.12) slightly outperformed RIT capital partners over the ten year period (evidence from FE analytics). The final return with an OCF of 0.12 (Fidelity index fund P), 1.02 (RIT capital partners; figures quoted by Fidelity and Interactive Investor) and 4.17 (RIT capital partners; the figure quoted by Chales Stanley Direct) would be (after 10 years) £256,559 (with fees of £2,815), £236,302 (with fees of £23,073), £176,234 (with fees of £83,140). These are huge differences!

    Clearly for the consumer, total investment costs should not be hidden in KIDs and should be shown upfront on the investment platform website as ONE figure (encompassing as you rightly suggest in your article directors’ fees, fund management fees, trading costs, administration fees paid to custodians, registrars, auditors, lawyers etc, interest costs, fees charged by any underlying funds, fees paid for ‘carried interest’ by the likes of private equity funds, plus an explanation of how these are calculated).

    Its quite simple really, customers need to know the TOTAL cost (total impact on return) of investing and illustrations of how this figure impacts on their returns in different market scenarios. It’s not rocket science and according to a recent statement by the FCA unrepresentative transaction costs are caused by “poor application of the priips methodology”. Instead of deliberately blurring the costs issues for the consumer, the The Association of Investment Companies (AIC) could help investment trusts managers to correctly apply priips methodology and not act like a former Eastern German stasi-like authority attempting to suppress the truth about investment costs (burning KIDs before reading etc. – how ridicilous!) It is my hard earned money they are extracting as fees after all.

    I am in full agreement with an FCA recent statement that “inconsistencies between documents and websites mean consumers can find the information difficult to understand”. Mr Andrew Bailey (FCA) went on to say, “While awareness of the rules appear good, we found that firms take inconsistent approaches, risking confusion for customers, who may be misled about how much they are being charged”. I totally agree and urge the FCA to take further steps to address this issue.

  3. @chrisB
    Totally agree. There was a good article from David Stevenson a few months ago looking at this very thing, highlighting the fact while institutions push back on this, no one is really fighting for us retail investors.

    Of course, some larger trusts do reduce the percentage as they grow larger, or have tiered rates, but they still don’t pass on the full cost savings.

    Yes, the fact that the OCF doesn’t include some pretty major costs has certainly been exposed by the introduction of KIDs. There’s still a long way to know but, hopefully, now the cost genie is out of the bottle we may see some sensible discussion about this and more consistency over time. I’m not expecting any quick fixes mind you.

  4. Until now I have ignored looking at KIDs, but would certainly change my mind if some of the suggestions mentioned in your helpful article were introduced. I would like to add details on directors’ shareholdings to your list. I realise that this information can be found elsewhere in an annual report but it is not always easy to find. A shining example is Scottish Investment Trust. In its annual report it carries pictures of all of its board. Underneath each picture are details of their annual fee and shareholding. It would also be useful to know the size of the lead fund manager’s stake in the fund. Where this is done by teams, a combined figure of the managers’ total shareholdings would be enough. HG Capital, for example, gives this information in a footnote in its accounts.

  5. Many of the figure you list would be much better displayed as graphs to show changes over time… e.g. gearing, discount, fees, performance, market cap, etc. With a figure for each year along the bottom of the graph would be even better. Similar to some of the graphs on Morningstar.

    The graphs should be standardised, i.e. all over the same time period – I don’t want performance over 20 years but gearing, discount, etc (which could strongly influence performance) over only 5 years. Also, a new trust with only a few years history should still display graphs over the standardised time period, leaving some blank space – to allow easy comparisons between older and newer trusts.

    If a trusts remit has significantly changed that should be marked on all the graphs with a note at the end to explain.

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