In spite of the Association of Investment Companies (AIC) boasting that sales of investment trusts have increased rapidly since the introduction of the RDR in January 2013, they still account for a very small percentage of platform sales.
On the Novia platform they account for somewhere in the region of 6 per cent of assets, and sales are still completely dominated by unit trusts and Oeics. And the evidence suggests that in every asset class it can easily be demonstrated that investment trusts consistently outperform open-ended funds.
This state of affairs is particularly surprising as under the RDR, advisers are required to advise on investment trusts as well as open-ended funds.
So why is this? The reasons, I think, are twofold.
Firstly, there is a lack of familiarity on the part of advisers and a fear that trusts are complex and unsafe.
Some advisers write off trusts on the basis they are ‘risky’, citing leverage and discounts/premiums as reasons to avoid them, but that may be a risky strategy if the FCA ever gets around to asking questions.
Investment trusts on the whole have very limited leverage, and that decision is being taken by highly experienced fund managers. Buying trust shares at a discount is also good for performance.
Many of the best trusts are managed by the same fund managers of very popular open-ended funds, so a little bit of time spent researching trusts might just pay off.
The other reason is that a number of platforms simply cannot handle investment trusts, or many other instruments for that matter, and have a vested interest in perpetuating the myth that such instruments should not be touched – indeed, such spoiling tactics are not unknown.
Things may change when those platforms deliver the technology that is required to trade trusts in the future, something being built now as a number of platforms are in the process of improving their technology.
Given that the vast majority of the money placed by professional advisers now comes onto platforms through some form of model portfolio – more than 90 per cent in Novia’s case – or centralised investment propositions, the investment in researching and monitoring trusts should not be that great, especially in relation to the gains to be had.
Finally, one of the other advantages investment trusts have over open-ended funds is that the trust’s board has a responsibility to monitor the fund manager’s performance, and can sack under-performing managers.
Compare that to an open-ended fund where a star manager – like, for instance Neil Woodford – walks away from his employer. Think of the near hysteria we have witnessed in the past few weeks as platforms and the likes have vied to get access to Woodford’s new fund.
Think, also, of the billions of pounds that might have walked from Invesco if investors had not been effectively ‘locked in’ to the Invesco fund by capital gains tax – switch out and you will be hammered by capital gains, stay in and you will not benefit from the ‘Woodford effect’.
On the other hand, the investment trust can easily just follow the manager by the board deciding to do so – a much better prospect.
Bill Vasilieff is chief executive at Novia Financial
