Woodford launch helps to raise profile of trusts

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Investment Trusts - October 2015

Investment trusts have tended to lag their open-ended counterparts in terms of popularity among advisers, but the introduction of the RDR was expected to change this.

The idea was that taking away incentives such as commission would result in advisers recommending closed-ended structures to the same extent as open-ended funds.

Recent figures from the Association of Investment Companies (AIC) showing purchases of investment trusts by advisers soaring in the second quarter of this year would, at first glance, appear to confirm this.

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The data from the AIC, using Matrix Financial Clarity, reveals purchases on platforms by advisers and wealth managers reached £260.8m – a record high – or 112 per cent higher than purchases made in the same quarter in 2014, and 108 per cent higher than the £125.4m recorded in the first quarter of this year.

Annabel Brodie-Smith, communications director at the AIC, notes: “Prior to the RDR coming into force (on January 1 2013), purchases of investment companies by advisers through these platforms held pretty steady, at around £200m per year.

“Since then demand has grown sharply, with purchases approximately trebling to £600m per year.”

She suggests that a more encouraging piece of data is the number of advisory firms recommending investment trusts has more than doubled from approximately 500 per quarter prior to the RDR, to more than 1,000 in the second quarter of 2015.

Simon White, head of investment trusts at BlackRock, notes: “Clearly, there’s a levelling of the playing field, where the adviser-charging regime meant there was no disincentive to buy closed-ended funds versus open-ended funds.

“I think the other factor that was perhaps not foreseen was the number of advisers who withdrew from offering investment advice… which I think was partly related to the business models that were, in some cases, dependent on renewal and upfront commission, and also the new regulatory regime in terms of compliance.”

He goes on: “But for the advisers that remain, quite a number have chosen to delegate the investment advice aspect of their role to wealth managers and concentrate on financial planning.

“And in terms of the investment trust sector, trusts have historically been an important component of wealth managers’ portfolios, and they’re familiar with some of the features that investment trusts have in terms of liquidity and discounts.”

But Mr White acknowledges the figure for purchases through platforms remains low when compared with funds purchased through platforms.

James Budden, director at Baillie Gifford, agrees there is “a long way to go”, but says the figures are largely positive.

“I think more generally it would help if we had greater distribution on platforms for closed-ended funds, and that’s been one of the failures of the RDR,” he points out. “It’s not the RDR’s fault, as such, but the response post-RDR, especially by the main platforms – Old Mutual, Cofunds and Fidelity’s FundsNetwork.”

He is quick to point out that Fidelity is working to change this by including investment trusts on its FundsNetwork platform, a development he believes will be a “good bellwether for the health of investment trust distribution among advisory firms”.