Economy

Why reforming UK capital markets starts with closed-ended fund cost disclosure rules

The start of the year has seen renewed focus on how we might make the UK stock market more competitive, and rightly so.

But left out of the broader conversation has been the listed closed end investment company industry, which has been grappling with issues relating to cost disclosure rules.

Christian Pittard, head of closed-ended funds and managing director for corporate finance at abrdn

These rules have been most acutely felt amongst companies investing in illiquid assets, distorting charges relative to open end funds and listed commercial companies, which has put our UK listed investment companies at a distinct disadvantage to their international peers.

Retained EU law has left us with an uncomfortable legacy, requiring UK listed investment companies and funds that invest in them to publish the costs of financing, operating and maintaining real assets such as property, infrastructure or renewable energy. 

That’s despite the fact that these costs are already published in regular company updates and reflected in the share price for all investment companies, and for investors it amounts to a double counting of costs.

It is double counting because ‘costs’, such as management fees, building maintenance and interest expense, are accounted for in the value of the share price, just as they would be for any other listed operating company, with key financials laid out in the report and accounts.

Equally, it is a ‘double counting’ for funds (either active or passive) investing in listed closed end funds to have to aggregate these regulated cost disclosures with their own costs, again because the costs are already accounted for in the performance of the holding and the value of the underlying holding.

The average London-listed investment trust is sitting on a discount to net asset value of 11.6%, with portfolios comprised of illiquid assets such as property and private equity among the worst affected

The average London-listed investment trust is sitting on a discount to net asset value of 11.6%, with portfolios comprised of illiquid assets such as property and private equity among the worst affected 

Just like any listed company, investors buy and sell at the share price not the net asset value, and the differences between the two can be significant, unlike open end funds or ETFs. It has impacted investor sentiment to the point where the disclosures could be adversely affecting investment decisions.

Reforming UK capital markets can’t be done without solving this conundrum, given that the sector accounts for around 36 per cent of the FTSE 250, according to the London Stock Exchange. 

Far from creating meaningful transparency, the rules have created distortions that in their current form could drive listed fund businesses to the NYSE.

Far from creating meaningful transparency, the rules have created distortions that in their current form could drive listed fund businesses to the NYSE.

The Autumn Statement saw Government move to resolve issues around the cost disclosure rules (in no small part thanks to Baronesses Altmann and Bowles). But while the regulatory wheels are now turning, we are at risk of stalling.

That’s because while the FCA were granted forbearance measures so that closed end investment companies and the funds that invest in them can provide an additional breakdown of costs and context, it doesn’t help data providers or investment platforms (which use the aggregated ongoing charge figure).

Great work has been undertaken by the London Stock Exchange and industry campaigners to galvanise support for a meaningful solution, which has been supported by the AIC. This has culminated in over 300 signatories (including abrdn) in a joint industry letter submitted by the London Stock Exchange on 10 January 2024 to HM Treasury.

This joint industry letter calls for listed closed-end investment companies to be excluded from the definition of Consumer Composite Investments. The industry is proposing to provide enhanced, clearer cost disclosure in its place that better reflects the true cost of buying and selling investment companies.

None of these issues mean we aren’t optimistic for the long-term prospects for the sector – far from it. The investment company sector has weathered many ups and downs over its one-hundred-and-fifty-year-plus history, and not just survived, but thrived.

UK market competitiveness

But we need an urgent solution, for a sector that has seen incredible growth in alternative assets over the past two decades. The closed end structure is well suited to the long-term assets that the UK Government is keen for investors to support. Over two fifths of listed closed end funds are private market strategies.

The unique structural advantages of the closed end sector will remain every bit of an opportunity going forward. But just as a great structure also requires great people, it also needs a supportive and competitive regulatory environment. And that’s a conversation worth having.

Christian Pittard is head of closed-ended funds and managing director for corporate finance at abrdn. 

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