Investment trusts - March 2012

Published by FTAdviser | Mar 12, 2012

The open-ended fund world is littered with portfolios that have been launched with an unsuitable strategy for an open-ended vehicle.

Whether that was property, particularly the more direct part of the market, or some of the frontier markets, open-ended funds received significant inflows because they seemed like they could start a trend. Since they were open ended, investors then assumed they could withdraw from them with ease. However, a number of specialist funds have been forced to stop investors withdrawing after it proved too difficult to sell the underlying holdings.

Investment trusts can better manage investors’ expectations. They allow providers to raise a finite amount for a strategy upfront. Their closed-end structure then makes it impossible for investors to sell their underlying assets without a special series of votes. They can then issue extra share classes such as

C shares at subsequent points as and when the markets in which they invest develop. And investors can always still sell the shares that back the investment trust’s assets, rather than forcing a fire sale of the assets themselves. Providers, therefore, can grow with the market, rather than grow the market itself.

In the case of specialist asset classes and other areas, independent financial advisers will need to consider investment companies as well as open-ended funds post-RDR.

Annabel Brodie-Smith, communications director at the AIC, says: “Although the RDR is a long-term opportunity for the sector, it is likely that the many benefits of the closed-ended structure, such as superior long-term performance, strong income records and suitability for investing in specialist asset classes, will attract more people to the sector.”

It is also becoming easier to buy investment companies, as major platforms such as Fidelity’s FundsNetwork have already outlined plans to add them to their offering. It is already possible to buy them through smaller platforms such as Transact and Alliance Trust Savings, but increased access and choice for advisers can only improve the prospects for the sector.

Jenny Lowe is features editor at Investment Adviser