Woodford launch helps to raise profile of trusts

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.

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”.

Nicky McCabe, head of investment trusts at Fidelity Worldwide Investment, forecasts that the greater availability of investment trusts through adviser platforms is “a trend which seems likely to continue in the future”.

“The unbundling of fees has also made it easier to sell investment trusts, since the fees paid for investing in open-ended funds are now much easier to compare with the fees paid to buy a share,” she suggests.

Certainly the much anticipated launch of Neil Woodford’s Woodford Patient Capital, which became the biggest investment trust launch in the UK when it raised £800m earlier this year, boosted awareness of the sector.

As Mr White says: “I think having a well-known fund manager talking about the benefits of the closed-end structure and, in particular, investing in smaller companies and less liquid assets, brings to the attention of a much wider group the benefits the structure can bring.”

But assuming the adviser purchase figures are sustainable – and both he and Mr Budden seem to think so – how can the investment trust sector maintain this momentum?

Mr White says: “The growth in demand [for investment trusts], which is partly related to income, has been beneficial for ratings of investment trusts, and a significant proportion of the sector is now trading at a premium to asset value. That has helped the liquidity and allowed wealth managers and advisers to allocate with confidence, because new shares are being issued.”

But Mr Budden calls on investment trust managers to “get out there and engage with advisers” – something he feels the industry has been relatively poor at doing in the past.

As he observes: “It’s cost-effective, high-class active management, and I think it’s difficult to find comparable funds in the global area of the IA [Investment Association] sectors, so I think the future’s very positive.”

Ellie Duncan is deputy features editor at Investment Adviser

ADVISER VIEWS: ‘WORTH A LOOK’

Gavin Haynes, managing director, Whitechurch Securities

We have no prejudice between open- and closed-ended funds and look for best of breed across both areas when selecting asset classes and individual markets. Over the past year, we had been investing less in trusts as we were seeing less value in the sector.

After a prolonged period of rising markets, we had seen increasing demand and many of our favourites were trading at premiums. However, the recent sell-off could offer attractive opportunities.

The move to transparent pricing and the end of renewal commission on open-ended funds has created a more level field and any adviser wanting whole-of-market status needs to consider trusts.

Jason Hollands, managing director, Tilney Bestinvest

We tend to use trusts for certain illiquid asset classes, such as infrastructure, private equity and venture capital, commercial property, and investment in renewable energy projects and other alternative assets. These illiquid asset classes don’t suit open-ended funds, as investments can’t readily be sold down to meet potential client withdrawals.

I do think the prospects for renewed interest in investment trusts post the RDR reforms were a little overhyped three years ago. While the commission bias that historically benefited open-ended funds has disappeared, so too has much of the cost advantage trusts have historically enjoyed.

Scott Gallacher, director, Rowley Turton

There was some interest in the Woodford Patient Capital Trust launch but generally clients are still not aware of the investment trust sector. As a firm we don’t tend to recommend investment trusts that often. The accessibility of trusts is still somewhat restricted as not all platforms offer access to them.

While investment trusts are typically cheaper than the comparable open-ended fund, they carry additional risks. Firstly there is the issue of discounts and premiums – the value of your investment can change due to the popularity of the investment trust itself. This can amplify both gains and losses. This increases risk significantly but also complexity. Secondly, there is ‘gearing’, where investment trusts can borrow to invest. Again this can increase gains but also magnify losses.