IT expert view: Annabel Brodie-Smith

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Investment trusts for income – December 2015

IT expert view: Annabel Brodie-Smith

The biggest challenge that investment trusts have always faced is convincing investors to use them. As a fixture at the trade association tasked with representing and promoting the companies, Annabel Brodie-Smith has done more than most to bring the closed-ended vehicles to advisers’ and investors’ attention.

Her time at the Association of Investment Companies (AIC) has coincided with a growth in the trusts’ assets from £58bn to £134.1bn as at the end of October. It is impossible to quantify how much of this growth is down to the Association’s campaigning and lobbying, but it is widely recognised as a key driver of expansion.

Despite this growth, there is still a long way to go. Ms Brodie-Smith is keen to ensure momentum is maintained and has been instrumental in introducing the educational drive that the AIC has spent the past few years pushing out to advisers.

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The programme involves a series of seminars all over the UK, online training for advisers and bespoke sessions, where the Association will go into investment firms to run sessions tailored for their needs. So far, since the start of the programme in 2011, over 4,000 advisers have taken advantage of the training, but, says Ms Brodie-Smith, “There is still a lot of work to be done.”

The material has had to adapt to cover a changing regulatory landscape, most notably the pension freedoms and how investment trusts can provide retirement income. The initiative is primarily designed to tackle the perceived complexity of the closed-ended funds, increasing familiarity with investment companies and hopefully increasing the likelihood of advisers using them.

Much uncertainty stems from the terminology unique to investment trusts. Ms Brodie-Smith concedes, “Most of the questions we get are about discounts and gearing, but what we do is explain those, and the benefits of the ability to gear, and the risks.”

The vagaries of these aspects of investment companies are a key part of their strength, she argues, “The reality is, with investment companies, you are going to get a more rocky ride but discounts, if they narrow, actually give you a boost and over the long-term performance figures back that up.”

The long-term strength of the trusts is central in their appeal as a source of retirement income. The industry as a whole is often criticised for being too short-termist in its outlook, a sentiment probably driven by investor demand, but one which is largely irrelevant to those same investors’ goals.

Long term

The pension freedoms that play to investment trusts’ strengths only do so in as much as there is a demand for regular income over a sustained period of time, and that is what investors should be looking at, Ms Brodie-Smith says: “ Retirement could last for 30 to 40 years. Looking at a one-year performance figure is really irrelevant. We recommend 10 years as a sensible time period. Most investors are investing on that timescale. They might not think they are, but they are.”

Investment trusts’ unique ability to retain up to 15 per cent of income on their underlying investments each year enables them to keep paying out income when times get tough. Ms Brodie-Smith continues, “The one thing we know about investment markets is times will get tough. When banks slash dividends or when BP has an oil spill, [investment companies] can draw on those revenues to boost income.”