When will we get a level playing field?

This article is part of
Investment Trusts - June 2015

The retail distribution review (RDR), which came into effect at the end of 2012, was supposed to usher in a new dawn for investment trusts.

Alongside advances in technology, the regulator’s requirements for advisers to consider all retail investment products led many to believe investment trusts would be a major beneficiary.

At the product level, investment trusts have long appealed to advisers, as their fees have historically been lower than those of equivalent open-ended funds. This advantage has often correlated with a performance edge for investment trusts over the longer term.

The fee discount has been somewhat eroded by the recent advent of clean-pricing for open-ended funds, but many investment trusts have responded by reducing or simplifying fees.

Their structure also has appealing characteristics for investors. Closed-ended vehicles such as investment trusts can provide a more suitable fund structure for less liquid assets.

In fact, much of the largest growth in the investment trust world has been in alternative assets such as commercial property, infrastructure and specialist debt. It is not uncommon to see these types of listed closed-ended vehicles providing yields of 6 per cent or more, with many regarded as genuine sources of uncorrelated income.

The importance of income should not be understated in today’s historically low-yielding world. Investment trusts have the ability to use revenue reserves to support dividend levels, even when the underlying revenue has been impacted by dividend disappointments. This was certainly true during the BP Deepwater Horizon saga, which caught out many equity income vehicles.

The fact investment trusts are structurally more capable of providing greater dividend certainty has seen equity income mandates re-rated in the past few years. In addition, a growing number of trusts – including City of London Investment Trust, Bankers and Alliance Trust – can demonstrate more than 40 consecutive years of dividend growth.

The above suggests both the structure and numbers behind investment trusts are fundamentally sound and should support increased implementation. In fact, there has been some recent momentum. Research from the Association of Investment Companies (AIC) has shown investment trust demand is growing strongly in terms of adviser purchases.

The launch of Neil Woodford’s Woodford Patient Capital Trust has shone another spotlight on investment trusts. Demand projections were materially surpassed, with support from leading platforms helping to raise £800m for the former Invesco Perpetual manager.

However, do not be fooled into thinking the level playing field for investment trusts that was forecast ahead of the RDR has arrived. This recent surge in demand is masking fundamental flaws. In reality, investment trusts have yet to see wide adviser adoption. AIC data shows the increased demand deriving from an extremely low base.

Investment trusts are still unavailable on a number of major platforms and high trading costs often preclude them from consideration. But independent advisers cannot ignore a product type just because it is not available on the platforms they use. The FCA’s directive is clear. Therefore it is not unreasonable for advisers to expect platforms to facilitate this necessity. Platform infrastructure has sharply evolved, so ‘whole of market’ investment solutions should be within reach for advisers.