OpinionAug 1 2014

Why hasn’t RDR catalysed an investment revolution?

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We received a vitriolic response from some readers for a story we ran earlier this week on advisers’ uptake of investment trusts post-Retail Distribution Review - or the comparative lack thereof.

The basic contention of the story was that despite some triumphal hyperbole from the closed-ended funds trade association, the Association of Investment Companies, the predicted revolution that would see swathes of clients moved from hitherto commission-paying Oeics into previously peripheral alternatives has not come to pass.

To recap some numbers: in March AIC reported a 67 per cent increase in adviser and wealth manager purchases of investment trusts for their clients in 2013 through the six bespoke wrap platforms that offer them, from £197m to £328m.

Impressive percentage growth, but still a relative drop in the sloshing oceans of capital invested and held in open-ended funds.

Investment trust sales via advisers reached a record high of £86m in the final quarter of 2013, compared to some £5.9bn sales of Oeics and unit trusts over the same period according to the Investment Management Association.

We ran the story under the (admittedly provocative) headline, ‘Advisers have not broadened horizons post-RDR’. Some intermediaries took umbrage.

Esteemed sector stalwart Phil Billingham left a comment which branded the angle “tacky”, while another unnamed respondent sensed an implicit bias on the basis of the perception of lower fees for trusts and said it was another example of journalists espousing the view that price is “everything”.

The general consensus of these febrile few and others on Twitter was that we had missed the elephant in the room that advisers know all about trusts, have done for a long time, and do not use them because they simply do not rate them.

We have heard the concerns before: market sentiment-defined pricing is potentially more volatile; gearing adds risk; secondary sales create distorting discounts and premiums, and can effectively limit the ability to exit and access the capital.

Others issues, which we dealt with in the story, include a lack of access on the largest platforms - Cofunds, FundsNetwork and Skandia do not offer trusts - mostly because, they argue, adviser demand is minimal.

Investment trust sales via advisers reached a record high of £86m in Q4 2013, compared to £5.9bn sales of open-ended funds over the same period

I have to say I have some sympathy with the platforms. Taken at face value Skandia’s latest adviser survey proves the point: on average only 7 per cent of advisers placed some client money in investment trusts in the three months to June, down from 10 per cent year on year.

In any case there are six platforms - Transact, Nucleus, Ascentric, Raymond James Investment Services, Elevate and Novia - that offer trusts. Given the independence rules do not allow use of a single platform to be an excuse for eshewing a suitable investment, there seems to be enough availability for advisers that wish to use them.

Which brings us back to the adviser concerns - and two immediate conclusions.

The first is the extremely positive sense that advisers did not disproportionately recommend open-ended funds on the sole basis of a venal commission grab, as some detractors had suggested. If they did, you would certainly expect sales to have risen more than they have.

But the second is that despite some movement, many advisers have truly not broadened their horizons, despite compelling evidence that trusts could provide stronger returns for, often, lower fees.

Analysis cited by the Guardian in May by Alan Brierley, analyst at stockbroker Canaccord Genuity, shows that over five years annual returns for 19 investment trusts were on average 2.24 per cent higher than a closely-associated open-ended cousin, often run by the same manager.

Obviously not all funds will produce this sort of performance, but this is a common finding in research and it challenges the negative perception that pervades across the advice community.

The element we are missing, that I believe might just square this circle, is risk, or more to the point the compliance-centric world in which advisers now operate.

Whatever the past performance of these funds - which is, of course, no guide to future returns - that the price is more exposed to market machinations, or that liquidity is theoretically reduced, or that gearing could exacerbate a poor run, adds risk. Advisers understandably prefer to play it safe, assuming they can continue to meet the client’s investment objectives.

The same is true of the likes of venture capital trusts, structured products, or other erstwhile esoteric investment choices which many thought would become fully mainstream post-2013.

All of which is fine in principle, but I worry about the threat to an adviser sector that could come across as curmudgeonly or set in its ways from DIY alternatives, and the flexibility and empowerment they might be seen to represent.