The planned closure of a small tracker fund has highlighted some big potential tax headaches for UK retail investors.
M&G Investments told clients in April that it would shut its European Index Tracker Fund at the end of next month, closing a modest £98mn fund, which managers have decided is too small to be viable.
About 80 per cent of the fund’s investors hold their stakes through tax-efficient Isas and will have the option of switching tax-free to another M&G fund or a different provider.
But that does not help an FT reader, who is questioning M&G’s move, because his stake is held outside an Isa or other tax-wrapper.
“I’ve effectively been kicked out and it shows that there’s no controlling investment managers,” says the retired art historian. “The fund hasn’t performed well, it has charged high fees, and now they’ve pulled the plug. It’s outrageous.”
The move highlights an issue that could affect investors holding similarly small funds that might be closed in ways that force some savers to crystallise capital gains — and so incur a tax liability.
The FT reader, who asked not to be named, bought about £100,000 worth of shares as a “core holding” at the turn of the millennium. This grew to more than £450,000 by the time he was informed of the fund’s closure. He calculates a looming capital gains tax bill of about £54,000 and has little time to reduce his liability.
Morningstar data shows that nearly 4,500 open-ended funds have merged or closed since 2013. The vast majority were liquidated and some analysts argue that the rate of consolidation is only going to accelerate.
“Regulatory changes forced asset managers to assess value for money, and it would be very hard for a board to continue to approve something so ‘vanilla’ with such a relatively high fee,” said Holly Mackay, chief executive of Boring Money, a financial website for consumers. “I suspect we will see more closures ahead as regulatory scrutiny steps up.”
The Financial Conduct Authority’s new consumer duty, scheduled for implementation at the end of July, will require companies to take “appropriate action” to avoid causing “foreseeable harm and provide fair value”. This builds on previous rules around value assessments.
M&G’s 2021-22 fund value assessment report said the closing fund’s performance must improve but its board judged that its two share classes could be rated “good” and “satisfactory”. It also concluded “necessary actions” had been taken to meet objectives.
Though M&G did lower fees on the fund from about 0.7 per cent to 0.5 per cent a few years ago, Mackay says this is still “hefty” for a tracker fund when others charge about 0.1 per cent. Our reader approximates that he paid some £35,000 in fees to M&G on the fund over two decades.
One boutique fund manager, who did not wish to be named, says M&G would have weighed up the possible reputation hit when deciding to close the fund, but still could have explored a merger with another fund or possible sale to another fund manager.
M&G said: “We considered a range of options but as an active asset manager, the only alternative passive M&G fund available was not suitable given it tracks the FTSE All-Share index, which offers significantly different geographical, sector and currency exposure to investors.”
“For those who invested directly with a fund manager, I’m afraid that you will often find yourself in a cul-de-sac with no way out other than to sell if they decide to close a fund,” says Mackay. She adds that this position can be offset by switching out of general holdings into an Isa, a process known as “Bed and Isa”, up to the £20,000 tax-free annual allowance.
If a fund does close on an unprepared investor, the options to offset the CGT bill are limited. Nimesh Shah, chief executive of accountancy firm Blick Rothenberg, says individuals can defer capital gains through investing in a tax-efficient Enterprise Investment Scheme fund. But these are risky investments in early stage companies.
Shah instead advises savers to move quickly to crystallise gains, buying more time to stow away the amount due to HM Revenue & Customs in a tax deposit account that earned interest.
This is little relief to the FT reader who had hoped to sell over several years to minimise his CGT liability. But other savers can still try to plan ahead for unexpected closures.
