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Adviser distrust of investment trusts

This article is part of
Guide to Investment Trusts

Many advisers have long held a certain distrust of trusts, which has been attributed to worries about their perceived complexity and liquidity issues and their use of gearing.

The over-magnification of these concerns is likely to be due to a lack of knowledge, many in the sector assert. To a certain extent, it also seems that this distrust is disproportionately prevalent in the adviser sector.

“The question is really one of a lack of familiarity and understanding of investment companies for advisers,” argues Annabel Brodie-Smith, communications director at the AIC.

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JPMorgan’s analysis of their investment trust shareholder base suggests that less than 1 per cent invested via an adviser, compared to a significant chunk of self-directed investors.

Ms Brodie-Smith reveals that advisers often cite IT’s gearing as a barrier to entry, due to the additional layer of risk it can introduce to a portfolio.

“The fact that investment trusts are also affected by market sentiment, as well as the performance of the underlying assets, has also been cited by advisers as a concern,” she adds.

Recently many boards have taken action to manage this through discount control strategies, by buying back shares and issuing new shares.

Liquidity, due to the closed-ended structure, has also been blamed as an adviser concern, but this is only really an issue for advisers looking to buy large amounts of shares and for most advisers it is unlikely to be a problem.

Another reason for the mistrust has been attributed to a lack of enthusiasm from asset management companies, according to Stephen Peters, investment trust analyst at Charles Stanley.

“Open-ended funds pay for vast marketing teams who take people out to play golf and push them a lot more than investment trusts,” he bemoans. “Under the new regulatory regime that has changed.”

Mr Moore agrees, saying IT’s capital structures may need a little more effort to understand and that this lack of understanding may also be down to ITs not being pushed by unit trust ‘salesman’.

“Typical salesmen are not remunerated by getting clients to invest in ITs so they have not pushed them and may have stressed the negatives more than the positives on ITs.”