Investment trusts wrong target for EU

May 26, 2009

REUTERSWell-intentioned legislation often has the opposite effect. The European Commission’s new alternative investment directive threatens investment trust companies, an attractive form of pooled investment.

The Commission aims to “enhance investor protection.” However, in addition to hedge funds, the original French and German target, investment trusts would be caught in the new regulatory net. Unlike other pooled funds, investment trusts offer transparency, low fees, the discipline of a public limited company and a vote.

For retail investors, trusts offer a cheap and easy way to diversify their investments. Because they are PLCs, they are subject to the British Companies Act, and the directive offers nothing by way of improvement. Moreover, it would impose obligations that may be impossible to meet.

Investment trusts have been around since 1868, when Foreign & Colonial enabled individuals to put money into the United States. Now, some 434 London-listed trusts manage around 75 billion pounds. They allow investors to put money into India and China, private equity, property, collateralised loan obligations and every other corner of the market.

They differ from unit trusts in that they are closed ended, i.e. the size of the portfolio is unaffected by shareholders buying and selling. Management costs tend to be low and, because they are closed-ended, the only other cost is the market spread on the shares.

The new directive would require funds to be independently valued. This is irrelevant for trusts. The transparency directive already obliges trusts to produce quarterly figures, but most trusts produce a daily net asset value. They already have an independent board that oversees valuation, and can sack the manager for poor performance.

Another provision of the directive seeks funds to offer immediate redemption of their investment. This is incompatible with the PLC structure. Investors can already trade shares daily in the open market — they simply have to take their chance with the share price on the day.

The directive limits “alternative” funds to professional investors, which would bar investment trusts from the investors who have most to gain from buying them.

Investment trusts companies are a British investment phenomenon. The Association of Investment Companies hope simply that the Commission has simply not thought about them.

The simple solution is to exclude any share traded on an EU-regulated exchange. Otherwise, this risks looking like another poke in the eye for “Anglo-Saxon capitalism”.

(Edited by David Evans)

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