Appetite shifts for trusts bought through platforms

This article is part of
Investment Trusts - May 2014

Some could argue that investment trusts have in the past suffered from having a somewhat mixed reputation, some people don’t trust them and many don’t fully understand them.

However, what is clear from the RDR is that from now on advisers keen to maintain their independent status are going to need to offer advice on them.

Recent research published by the AIC has shown a significant shift in the appetite for investment trusts (ITs) purchased through platforms.

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Although investment trusts are still currently a small market – only 300-odd funds against the tidal wave of nearly 7,000 FCA registered open-ended funds – sales of investment trusts are gradually beginning to blossom and grow under the post-RDR regulations.

As ITs are companies, the supply of shares is limited so the price changes according to demand for the shares and their availability. Thus the price can be at a premium, or conversely a discount to the net asset value (NAV) of the underlying portfolio of securities.

Oeics on the other hand respond to demand simply by issuing or redeeming shares – the price is therefore always a reflection of the fund’s NAV. This additional scope for price volatility is seized on by some as a ‘red flag’ – the implication being investors are more at risk.

ITs are also able to borrow money, or ‘gear’ to increase exposure to real assets in order to enhance gains. This facility is similarly used by IT detractors to warn off retail investors as gearing can clearly exacerbate losses as well as complement performance.

However, it was advisers’ dependence on commission and ITs’ lack of margin to fund it, that meant recommendations to buy ITs were a rarity pre-RDR. The emergence of platforms in the late 1990s was the catalyst for change.

Fund supermarkets didn’t have the functionality to buy and sell ITs since they were traded on the market rather than simply being bought and redeemed via a fund manager. The lack of demand for ITs did not inspire those platforms to invest in the systems required to facilitate IT business. Sales teams of fund managers were not motivated to market ITs instead of Oeics. So the entire system seemed to conspire against any renaissance of a robust IT industry.

It was hoped the RDR would establish a ‘level playing field’.

In spite of the findings of an increase in platforms sales of ITs, it seems the market share of platform business has hardly rocketed. A 0.4 per cent market share in 2012 became 0.5 per cent last year. It remains to be seen how those figures may change going forward.

However, the fear of ITs is exaggerated. While some trusts may evidence extreme premia or discounts, by and large the “distribution of danger” is no wider than for Oeics.

The median discount within the IT universe is approximately -6 per cent, and rationally a buyer would rather purchase assets at a discount than the full price of the equivalent Oeic.