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
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.
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…