IT expert view: Annabel Brodie-Smith

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.

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.”

Balancing the volatility

She goes on to highlight that 18 different companies can boast a 30-year or longer record of increasing dividend payments. This goes some way to balance the higher volatility of the products, “You will get fluctuation but an increasing dividend is very reassuring to investors.”

Ms Brodie-Smith is clear that “the income story is dominating demand,” but she insists there is still scope for growth investment within the closed-ended universe. Private equity and emerging markets are both given as examples of sectors which have been challenged recently and present opportunities for growth.

The most popular sectors though remain Global and UK Equity & Income, but beyond them, more obscure sectors that bring out the strengths in investment trusts are attracting interest. As Ms Brodie-Smith explains, “the trend is for retail sectors but after that it is illiquid assets, such as property or infrastructure. That is different to how people thought RDR would work. They thought it would just be the big, retail-focused investment companies that benefited. They are benefiting but what’s interesting is those illiquid assets that we have a specialism in.”

This demand is further evidence of the thirst for income, she argues.

The figures have been distorted slightly this year by the launch of Woodford’s first closed-ended fund, the Patient Capital Trust. Neil Woodford is a big enough name to cause disruption in any market and investment companies proved no exception as the trust raised some £835m.

A familiar name from the open-ended investment world will not have done any harm in tempting some advisers to try closed-ended investments: “Woodford is using an investment trust because it allows him to access things – small illiquid start-up type companies – that he just couldn’t do with an open-ended fund. It is opening advisers’ eyes,” Ms Brodie-Smith argues.

Beyond Woodford’s impact, the sector as a whole is doing well though, as she identifies, “Old global trusts like Witan and Scottish Mortgage and City of London, and Finsbury Growth & Income, have been issuing lots of shares.”

She continues, “What’s interesting is we’ve got a lot less money leaving the sector. “We’ve had more issuance in other years, but we’ve got a lot less leaving. That is down to strong performance and the investment company structure offering investors what they want.”

Much of the coverage is seen to be setting investment trusts in opposition to their open-ended counterparts, but any growth in the closed-ended universe does not necessarily need to be offset by trends within the open-ended sector. As Ms Brodie-Smith adds, “This is a big enough world for both forms of investment.”

Investment trusts’ case has not been helped though by a lack of availability through the big adviser platforms. FundsNetwork has just announced it is to offer a limited range, but Old Mutual and Cofunds have yet to announce any plans to follow suit. Ms Brodie-Smith says, “They have been available on all the wrap platforms since day one, so it seems strange that they are not available everywhere.”

Any limited availability has not dealt a mortal blow to the vehicles though. Sales through platforms have trebled from around £200m three years ago to around £600m a year today. And FundsNetwork’s announcement is a definite positive according to Ms Brodie-Smith, who describes it as a “huge and encouraging step forward.”

Annabel Brodie-Smith’s 18-year career has been littered with changes to the sector she oversees, often driven by her, and this looks likely to continue. As she admits herself, that is what keeps her coming into work, “There is always something happening. That’s what makes it interesting and challenging. There is never a dull day.”