InvestmentsNov 28 2013

Changing perceptions to boost performance

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Advisers are turning more towards platforms and discretionary managed services, and with no more commission payable from providers to intermediaries, products such as investment trusts are becoming more interesting to advisers as they seek out performance for their clients.

This was the message from Financial Adviser’s breakfast seminar, held in Nottingham’s historic cricket ground Trent Bridge and sponsored by asset management firm Smith &Williamson and wrap platform Novia. The subjects under discussion were outsourcing investment management via a platform, and the use of investment trusts in a managed portfolio service.

After a brief introduction, Mickey Morrissey, partner and head of IFA sales for Smith & Williamson, told the packed audience of financial advisers about the heritage of Smith & Williamson – its founding in 1881 and its history of creating investment funds – and that the firm had recently been turning its attention to the advisory marketplace. “This is an area we want to serve,” he said.

Turning to the question of why Smith & Williamson uses investment trusts and exchange-traded funds within their portfolios, he said that while investment trust companies are the oldest form of collective investment funds in the UK, they appear to be the least understood. And this is despite strong performance and some strong fund managers running them.

“There are so many big-name managers running investment trusts, and you can see that their performance outstrips that of their existing unit trust funds,” said Mr Morrissey.

He cited the example of Invesco Perpetual’s fixed-income duo Paul Causer and Paul Read, whose investment trust version has overperformed, as well as Aberdeen’s Hugh Young.

Mr Morrissey acknowledged that there are some risks, such as the discount spread moving against investors and making it harder to sell or more expensive to buy, as well as gearing – which some advisers afterwards questioned as being a big risk, as borrowing for growth can turn against the investor and cause the investment trust to fall further if there is a downturn. However, Mr Morrissey said that if investors had invested in Hugh Young’s New Dawn trust fund instead of his open-ended Asia-Pacific Unit Trust, they would have received a 113 per cent better return over the period that both have been available.

In his presentation, he told delegates that the investment trust company sector has net assets of £103bn, with a market capitalisation in total of £93bn, making it a “stable and established” investment class, with independent and active boards of directors overseeing them. Mr Morrissey explained that this was why Smith & Williamson spends so much time researching them and putting them into discretionary managed portfolios.

In fact, a range of portfolios has just gone live on the Novia platform, which aim to give advisers the use of investment trusts and the expertise of Smith & Williamson, without the IFA having to conduct all the investigatory due diligence on individual investment trusts themselves.

Bill Vasilieff, chief executive of Novia, told the delegates that, regardless of their feelings about gearing or share price movements, if they wanted to be independent, they needed to be able to advise on investment trusts.

He quoted from the Financial Conduct Authority’s latest paper on collective investment propositions and said that if advisers were to remain independent they could not ignore the FCA’s guidance. That is why if they were to use an open architecture-style wrap such as Novia, they could still give clients access to the best investment trusts and other funds that some platforms do not. He mentioned that one of the largest platforms had told the market it would not be bringing investment trusts on board, but warned that this stance could set some providers at odds with the regulator.

Mr Vasilieff claimed to be “a recent convert” to investment trusts himself, as he has moved his own money in the past six months from open-ended versions to the closed-ended versions of investments from leading fund managers. He showed slides of the performance of Standard Life’s Henry Nimmo’s unit trust and investment trust to explain how he could get better returns with the same risks, and strategy and expertise.

He said: “If advisers want us to provide access to expert portfolio managers, why are they not considering using those DFMs that offer investment trusts within their portfolios? They are expertly managed, outsourced propositions and it is only a matter of time before the FCA comes knocking to ask ‘why not’?”

He added it could be a lack of familiarity or a perceived/real complexity about some products and increased risk among those trusts that use gearing or are susceptible to corporate activity. But by shutting the door to investment trusts, advisers also risk giving up a lot of performance, failing to fulfil the ‘independence’ requirements and not delivering the best service to clients.

There followed a question-and-answer session, led by Financial Adviser’s news editor, Simoney Girard, who asked what would happen to those platforms that do not provide access to investment trusts.

Mr Vasilieff replied: “Well, they are not fit for service. They are not facilitating independence for the advisers who use them, and if more IFAs start demanding investment trusts and access to more discretionary managed portfolios that use investment trusts, the platforms will have to back down.”

When asked if there was likely to be consolidation of platforms, Mr Vasilieff said he did not think so; given the hundreds of fund management groups out there it was not improbable that the 30 or so platforms could all also find a niche. However, Mr Morrissey said it was becoming far too expensive for many providers to keep changing and updating their offerings. Bill Vasilieff quoted one life company as having spent £700m already in developing their platform.

From the floor, investment adviser Enzo Maffioli of Blyth-Richmond Investment Managers, said he has been an advocate of investment trusts – one of just a handful there. Most delegates said they were not yet using them, but were interested in finding out more.

He claimed he needed to consider whether to get a protection mechanism on discounts with some investment trusts, but was not sure where to find that information.

Another adviser, Andrew Jackson of Jackson Law Financial Management, said he had not yet started to use investment trusts, but if clients wanted to put money on platform into a discretionary managed portfolio, how much influence would the adviser have over how the money was invested. Mr Morrissey said the portfolio manager would be the one investment decision maker once the money had been placed in a managed account. When asked how much it could cost to invest in a DFM on an open-architecture platform, Mr Morrissey said it would be from 50 basis points down to 15 basis points as a general rule, based on investment levels.

Simon Watts of Boolers said he could explain premiums and discounts well to his clients and they could understand this. But what put him off was liquidity. He asked: “How liquid are they to trade? It might be okay to put money into a big-name fund, but what happens when you need to take it out? For example, after Neil Woodford announced he was leaving Invesco, his investment trust share price fell several per cent. How can you screen for liquidity risk?”

Mr Morrissey replied there were funds that were “just too small” to be chosen for the S&W portfolios as they could get wound up or liquidity would be a big issue. However, he said with the larger investment trusts, this still had to be offset against the far greater rises in net asset value than the client would have got in the comparable unit trust.

As the session closed and delegates discussed the issues over tea and coffee, it became clear that the main reason advisers were hesitant still was not primarily the perceived complexity of investment trusts – although that is a concern when explaining them to clients. What has really been holding them back is whether they can remain independent. One adviser, who did not want to be named, said: “If I can stay independent – and that is looking like a big ‘if’ – then I will want to know about investment trusts and how to use these on platforms. However, if I have no choice but to go restricted, then I may just restrict myself to open-ended funds. It’s not the product but the regulation that is driving my choice.”

So while the complexity of explaining liquidity, gearing and discounts to clients could be a barrier, if advisers want to be independent, there are ways to give clients access to the best investment trust managers through open-architecture platforms, and in discretionary portfolios whose managers will do the research and selection for them.

Ruth Cant is a freelance journalist

AT A GLANCE

Following the RDR, products such as investment trusts are becoming more interesting to advisers as they seek out performance for their clients

The investment trust company sector has net assets of £103bn, with a market capitalisation in total of £93bn

The factor holding back advisers is whether they can remain independent with investment trusts