Page 17 - DIY Investor Magazine | Issue 39
P. 17

       ‘THE PERCEIVED RUNNING COSTS OF INVESTMENT COMPANIES MAKE THEM TOO EXPENSIVE TO FIT INTO PORTFOLIOS ANYMORE’
It could give up the tax benefit of the investment company structure and become a ‘normal’ company. It is likely that either way it would have a similar level of overheads.
When an investor buys a company, there is an acceptance that net returns after costs drive share price performance.
Yes, it is important to keep an eye on what management are spending (and nobody, especially me, is suggesting that costs can be ignored), but overheads are only a small part of the consideration. Why should investment companies be any different?
But I don’t base my entire investment decision on charges,
I can hear you saying. Well, you may not, but for many professional investors that report on charges to their clients, the perceived running costs of investment companies make them too expensive to fit into portfolios anymore, regardless of how well they are doing.
The new UK Consumer Duty rules have compounded the problem again by putting an onus on dealing platforms to ensure that their customers are getting value for money.
Now retail investors are being blocked from buying some investment companies on cost grounds, based on misleading cost figures and I suspect in some cases just based on costs not the return after cost.
Many of you may also have observed a widening of spreads – the gap between the selling price and the buying price – for investment companies. The problem with spreads also goes back to AIFMD.
The banks that own the brokers are subject to Basel rules that govern the amount of capital that they are required to hold. Under these rules, AIFs – which everywhere else other than the UK are things like hedge funds and baskets of stocks and derivatives – are designated as Collective Investment Undertakings (CIUs).
For regulatory capital purposes, brokers are required to hold 8% of the value of their equity positions as capital, but for CIUs the figure is 32%. This has massively shrunk the amount of capital that brokers are prepared to commit to making markets in our stocks.
Again, to illustrate the absurdity of this, if a broker holds
100 individual equities, its capital requirement is four times lower than if it has exposure to the same equities through an investment company structure.
And it gets worse, from 2025, with Basel 3.1, the capital requirement to hold CIUs will rise to 70%.
There is an easy fix to this, turn the clock back to 2013 and reverse the ruling that investment companies are AIFs.
That is what a number of industry participants are hoping for. It will not be a panacea for all of the sector’s ills, but it might halt the current buyers’ strike that has caused share prices to collapse.
James Carthew, is head of investment companies at
17
Nov 2023
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