Nick Britton, head of training at the Association of Investment Companies, on the shifting relationship between adviser and investment trusts.
When it comes to winning the love of advisers, investment trusts have had the odds stacked against them for quite some time. Unable to compete with the commission arrangements offered by the open-ended sector, they have been dismissed as over-complicated, risky and hard to access – that is, if the adviser had a view on them at all.
But this is changing. Commission from open-ended funds has been banned, and though some big platforms are still unable to offer advisers a full range of investments, others including Nucleus provide easy access to investment trusts. There is even a regulatory requirement for independent advisers to consider investment companies as part of their ‘whole of market’ obligation.
Taking a fresh look
These developments have seen platform purchases of investment trusts by advisers more than double between 2012 and 2014, to £452 million. Admittedly, this figure is still tiny compared to the value of units purchased in open-ended funds (over £14 billion), and it is clear that many advisers have yet to be convinced of the sector’s merits. But a growing minority are taking a fresh look at the sector in order to differentiate their offerings from competitors and gain some performanceedge.
The move towards investment trusts is not just driven by regulation. The sector has also been striving to enhance its attractions to advisers and other investors.
The most obvious example of this is in the realm of fees. Since October 2011, 34 investment companies have announced that they are scrapping their performance fees. Among these are familiar, retail-focused names such as Foreign & Colonial, City of London and Edinburgh Investment Trust. In 2014 alone, 10 per cent of investment companies changed their fee structures to the benefit of shareholders, whether by abolishing a performance fee, reducing annual management fees, or simplifying their charging structure.
Investment companies have also sought to feed the insatiable hunger for income that has characterised the past few years. There have been dozens of new launches in sectors such as infrastructure, specialist property and debt, which aim to provide income that is not correlated to equity markets. A number of private equity trusts have taken advantage of new rules to pay dividends out of capital profits, while VCTs have continued to offer generous tax-free dividends from their maturing portfolios. And of course, many equity-based investment trusts have added to unbroken multi-decade records of annual dividend hikes, taking advantage of their ability to smooth income streams over time.
Investment trusts in a post-RDR world
Finally, discount control policies are now the norm, with a majority of investment companies (64 per cent) having them in place. Discount volatility remains a key concern for advisers, and such policies have proved effective in putting a floor under discount levels in normal market conditions.
Behind all this is a sense that if investment trusts are to compete in a post-RDR world, it won’t be sufficient to point to long-term performance advantages, however impressive they may be. They also have to offer competitive pricing and meet the specific needs of advisers and their clients. Happily, many appear to be doing just that.