Are IFAs in a post-RDR world beginning to fall in love with investment trusts for the very first time? Is it a case of puppy love?
According to the Association of Investment Companies, investment trust love is very much in the air. Late last month it reported a resounding boom in the purchase of investment trusts on leading adviser and wealth manager investment company platforms. In fact a 53 per cent boom in the first six months of 2013, compared to the same period in 2012.
The figures, so my AIC sources tell me, caused a smile to break out on the face of Ian Sayers, the association’s numero uno. No mean achievement I can tell you, so say my same AIC sources.
“It’s encouraging to see such a strong increase in platform purchases by advisers, albeit from a low base,” he said, zipping from a glass of nicely chilled Viognier handed to him by his delightful communications director Annabel Brodie-Smith. “We realise there’s a lot more work to do but we are heading in the right direction. Advisers are much more engaged with the sector than we have seen in the past, with many attending training sessions to find out how they can include investment companies in client portfolios.”
All rather heartening for an industry that goes back much further in time (1868 and the launch of the Foreign & Colonial Investment Trust) than unit trusts (1931 and M&G’s First British Fixed Trust) but which in recent years has been in the unit trust sector’s shadows.
Unit trusts have had commission payments on their side to attract the business of investment advisers and low-cost fund platforms. In contrast investment trust companies have not stood a chance. Discounts? Gearing? Better performance? Lower charges? Better control over dividends? Forget them all. As far as most advisers are concerned, it has been a question of: give me a unit trust (and the commission) every time.
Of course RDR changes the game, giving investment trust companies a fairer crack of the adviser whip. Yet, as Mr Sayers said, it is early days. The investment trust penny has not really yet to drop.
It is a point shared by Jasper Berens, the feisty and fiercely intelligent head of UK funds for JP Morgan Asset Management. Earlier this year he polled some 469 IFAs attending its fund manager roadshows. Only 29 per cent admitted they currently used investment trusts while 26 per cent said they would not recommend them under any circumstances.
Encouragingly, as far as Mr Berens is concerned, 45 per cent said they would ‘look to use’ investment trusts in the next three years although ‘looking to use’ is a bit of a cop-out – it is a bit like when someone says to my face they will go away and read one of my articles when their eyes tell me they have no intention of doing so. They are only saying it not to hurt my feelings. It is easier to say ‘maybe’ than ‘not in a million years’.
Mr Berens, however, seems to be on a mission. He believes that many investment advisers are doing their clients a ‘disservice’ by not giving full consideration to investment trusts. Indeed, give him a glass of Viognier from the same bottle that Ms Brodie-Smith poured from and he would go as far as saying that it is simply not good enough for an adviser to glance at investment trusts and immediately deem them unsuitable for their client base. He says it flies in the face of rules laid down by the FCA which stipulates that investment trusts must be considered equally alongside open-ended funds (Oeics and unit trusts).
To prove his point Mr Berens points to the performance of two fund portfolios run by the very talented Georgina Brittain at JPM (believe me I have interviewed her, she is bright and she is good).
One is the JPM UK Smaller Companies investment fund, the other is the JP Morgan Smaller Companies Investment Trust. Ms Brittain has been running the investment fund since 1987, the investment trust since 1998. Both are investing in UK smaller companies so are comparable.
Yet in the past five years the investment trust has easily outperformed the investment fund. Why? Because in the investment trust Ms Brittain has been able to borrow cheap money to invest into a market upswing. And the annual management charge on the investment trust is nearly 50 per cent less than that applied to the investment fund – 0.8 per cent versus 1.5 per cent (1.25 per cent if bought through Hargreaves Lansdown). So more of an investor’s money is actually getting invested.
The X factor is the discount. Currently the investment trust is trading at a double-digit discount – presumably because UK smaller companies are not actually that much loved by institutional and private investors alike. As Mr Berens said: “In our view, a financial adviser is not best serving their client if they fail to recognise the potential made available by that discount.”
Hopefully, with better access to investment trusts through platforms and more information and training made available to advisers (over to you Mr Berens and Mr Sayers), financial advisers can fulfil their regulatory obligations and start properly considering investment trusts.
Puppy love may indeed blossom into a marriage made in heaven. Advisers and investment trusts, hand in hand. A sight to behold. Time for yet more Viognier.
Puppy love may indeed blossom into a marriage made in heaven. Advisers and investment trusts, hand in handJeff Prestridge is personal finance editor of the Mail on Sunday
