IT expert view: Francis Klonowski

Have the retail distribution review, retirement freedoms and other initiatives expected to boost investment trusts actually had an impact on how many clients ask for them, or how many advisers recommend them?

Francis Klonowski, principal of Leeds-based Klonowski and Co, is a keen, long-term advocate of the closed-ended investments. He has used them as the basis for portfolios since beginning as an independent adviser in 1991. He says his typical client’s portfolio is made up of between 50 and 75 per cent investment trusts, “The only reason they can’t take up 100 per cent is because they don’t have any fixed income funds,” he says.

He is also a regular winner at Money Management’s annual Financial Planner awards; as well as taking the overall award twice he has won the Investment Companies Planner category three times – in 2002, 2011 and 2014 – and been runner-up twice.

It is fair to say he knows about investment trusts.

His early adoption of a fee-based model has almost certainly made it easier to embrace the vehicles. Famously, the lack of commission paid on investment trusts was often cited as an obstacle to advisers recommending them in the days before the RDR, when they would instead rely on commission-paying, open-ended vehicles that often underperformed closed-ended funds.

Recalling those days, he says, “It was always interesting, whenever advisers or advisory firms said which investment trust they would use, it is amazing how often Foreign & Colonial and Witan were the names that were suggested; they were the only two that paid commission.”

Mr Klonowski say those were the “more commercial” investment trusts, which had a bit more marketing clout and would do seminars.

Asked why more didn’t pay commission, the adviser says simply, “Because they didn’t need to.”

He argues that they knew that their market was always the more specialised adviser and broker, “When you say how much do they differ from unit trusts, it’s because they’ve never had the big marketing budgets. They didn’t go out on roadshows or spend money on marketing and glossy advertising because they knew there were enough specialist people to buy the funds.”

“I always imagine investment trusts sitting in dusty old offices down the back streets in London, never meeting an IFA or a network salesman, but just looking after clients’ money and making it grow.”

Lack of availability

The lack of availability on some platforms is also frequently raised as an issue, but for Mr Klonowski, the biggest issue was always commission, “Even when platforms came along with the likes of Transact, I don’t think you saw any great increase because other excuses were used. And yet, if you were doing financial planning and you were charging fees properly as opposed to taking a percentage of assets, then they were the ideal vehicle.”

But now commission has been removed as a hurdle, there is still no great use of trusts through the platforms that underpin most adviser business today. Mr Klonowski recalls, “About two years ago at an AIC seminar in Manchester, Annabel [Brodie-Smith] asked who used investment trusts, very few put their hands up. When she asked why, the first reason given was that ‘my platform doesn’t allow them’; the thought wasn’t ‘well, let me find a platform that does’.”

The lack of trusts on platforms seems like a distraction. Many successful established platforms have always offered them. As Mr Klonowski recalls, “When Transact came in, it was a joy to behold. They not only allowed investment trusts onto the platform, but actively encouraged them through a link with Morningstar.”

But, a decade and a half on from Transact’s launch, the three big platforms show little sign of developing their offerings to embrace closed-ended funds. A limited range is about to be made available through Fidelity FundsNetwork (along with some ETFs, another vehicle previously neglected by the platforms) but Cofunds and Old Mutual insist they have other, more pressing priorities.

“When RDR first started, what was interesting is the major platforms would say things like ‘we are looking at…’, ‘we are considering…’ There was nothing about ‘we should do this,’” says Mr Klonowski.

But this platform reticence might be motivated by a broad lack of demand. While investment trusts have enjoyed some growth, their market share is still dwarfed by the money tied up in unit trusts and Oeics. And the levels of inflows recorded do not suggest any reversal soon. There remains doubt as to whether there is an appetite among individuals for investment trusts, which are perceived as complicated for mainstream investors to understand.

Francis Klonowski identifies this, but dismisses the fear, “People are trotting out the same excuses. The one I read most often is ‘they are too complicated for my clients’. These would be people who might have been using with-profits bonds – you can’t get more obscure than that – and also probably using absolute return funds or structured products, and yet they say investment trusts are too complicated. Where’s the complication?”

When I suggest these advisers might actually mean that the vehicles are too complicated for them, Mr Klonowski is diplomatic, “Of course, but I was trying to avoid saying that.”

A lack of adviser knowledge is unforgiveable though, he argues. While applauding the AIC drive to educate the masses, he insists all the information required is all already there if you look for it.

The terminology most often cited as problematic is not as confusing as it is depicted to be. What ‘gearing’ is and what ‘discounts’ means should not be beyond the grasp of a financial planner who spends their days dealing in various financial products underpinned by different convoluted mechanisms.

Sophisticated investors

The simple fact is there will be no significant upturn in investment trusts’ fortunes unless advisers start to recommend them. The target market should be sophisticated investors – advised clients in other words. These people are unlikely to be comfortable diving in themselves and need their advisers to understand the vehicles so they can recommend them appropriately.

But hopes of an increase in demand driven by clients are a long shot at best. As Mr Klonowski says, “It’s what we suggest to people that they are guided by.”

That is how it should be too, he says. He recalls sitting in on a telephone interview between a bank and client, when he heard the bank asking whether the client preferred active or passive: “I thought ‘He shouldn’t choose those things; it’s you that recommends them.’ It’s the same with investment trusts.”

In the entirety of Mr Klonowski’s client base he says there is one client who has always expressed a preference for investment trusts, “but they were connected with our business before I met them.”

Even the retirement freedoms and the seemingly perfect marriage of income-providing trusts and a retirement funding requirement has not motivated any enquiries. “That hasn’t made a difference, he says, adding, “They are still looking to me to suggest the best ways of populating the portfolio and if I suggest investment trusts and the reasons for them, they take that guidance.”