Investment trusts are still excluded from the largest distribution platforms despite clear evidence that there is increasing demand from investors through wrap and D2C offerings.
In theory, the consequences of the RDR should be positive for the investment trust sector. The abolition of commission and the need for IFAs to take a whole-of-market view when assessing investments levels the playing field between closed and open-ended funds. Nowadays, intermediaries should be able to judge the two fund types on the basis of investment proposition rather than structure.
However, a significant barrier remains in place. Investment trusts are still excluded from the largest adviser platforms. Cofunds, Skandia and FundsNetwork do not list investment trusts, nor do they have any plans to do so in the near future; FundsNetwork’s plans to do so have been put on hold. The platforms cite a lack of demand as the reason for this omission; apparently their clients have no need or desire to access this £100bn sector of collective funds. Passive strategies and discretionary manager portfolios are considered more of a priority.
Gaining access
The good news is that investment trusts are available on other smaller platforms, as shown in Table 1. This includes wraps and direct-to-consumer platforms. In most cases they are accessible as an equity investment within the investment companies sector of the LSE.
People want to invest in investment trusts and all adviser platforms should allow them to do soTransact has carried investment trusts alongside open-ended funds since its launch. Nucleus, Novia and several others allow purchase of investment trusts via their equity service. Alliance Trust Savings has been selling trusts directly for years and is now expanding into the adviser market with open-ended propositions.
Yet perhaps platforms are missing an opportunity to champion the cause for the investment trust sector with intermediaries post-RDR. Hargreaves Lansdown has never been vocal in its support of investment trusts, yet its client base of 446,000 investors on Vantage has shown a particular liking for them – despite the host platform never having promoted them in the way they do Oeic funds. Indeed, Hargreaves has been noted as a top 10 shareholder of a number of mainstream trusts.
Other D2C platforms such as Barclays Stockbrokers, TD Waterhouse and Halifax are also keen buyers of trusts; clearly demand is present. At the moment this demand can be most seen in the direct space. But this gives lie to another often used excuse about closed-ended funds that they are too complicated for the man in the street. People want to invest in investment trusts and all adviser platforms should allow them to do so.
Level that playing field
But it is not enough that investment trusts are just listed on platforms. They need to be listed alongside all other collective funds. This is not the case at the moment, as Table 1 demonstrates.
Investment trusts need the same status on platforms if they are truly playing on a level field. This can be extended to performance measurement and the media. Trusts should be compared directly to Oeics and they should not be treated as an alternative asset class akin to property and private equity. After all, they are investing in the same stock markets as open-ended funds.
It is also a myth that investment trusts are opaque and do not provide the same level of information as Oeics. Arguably, as corporate entities the level of disclosure and transparency is higher for investment trusts. They issue annual and interim reports and their managers offer the same factsheets and updates for trusts as they do for Oeics. More than anything it is an industry-wide mindset that needs to be addressed before the playing field can be properly levelled.
A short list
If the big three platforms wanted to give trusts a chance they could do worse than list the leading players within the sector in order to test demand for the sector as a whole. The top 20 investment trusts bought on the Alliance Trust Savings platform are shown in Table 2, which includes several well-known names such as Murray International, Personal Assets, Scottish Mortgage and Templeton Emerging Markets. All have strong performance records, a sense of history and name recognition, high levels of liquidity and clearly differentiated investment propositions. In addition, ongoing charges tend to be low.
Demand for these market leaders among wealth and discretionary managers is already evident. Discounts are reducing and several trusts are issuing shares at a premium. Furthermore, if Skandia, Cofunds and FundsNetwork wanted to filter the sector efficiently, they could list trusts which have made it onto Morningstar’s gold and silver ratings. Newly established, they bear comparison with the firm’s established OBSR rankings for open-ended funds. A toe in the water cannot do any harm.
Equality matters
Investment trusts can offer cost-effective active management. The performance record across the sector compares favourably with open-ended funds and respective regional indicies. Demand for trust shares is clearly evidenced by business through wrap and D2C platforms and also through discount movements.
Yet the best hope for increased interest in the sector still appears to lie at the margins rather than in the mainstream. Individuals – perhaps those dis-intermediated post-RDR – are buying trusts and some wealth managers are using them in the outsourced solutions they offer to the IFA market.
But the many IFAs using Cofunds, Skandia and FundsNetwork are currently missing out. Perhaps, they should agitate to end this distribution apartheid and demand equal rights for investment trusts.
James Budden is director of marketing and distribution at Baillie Gifford
