Unit trusts have for too long been the go-to option for advisers. This may be in part because advisers understand them and feel confident explain where money is going to their clients. Investment trusts often fall under advisers’ radar.
Yet closed-ended funds consistently outperform their open-ended rivals. On average, £100 put into investment trusts return £203 over 10 years and £471 over 20 years, compared to £167 and £329 respectively for closed ended funds respectively. This remains true for shorter term investments, the details of different time scales are shown in Table 1.
This may lead investors to wonder why their adviser had not brought these types of funds to their attention sooner. It may have been due to the charging structure that advisers could offer prior to the Retail Distribution Review (RDR). Prior to the regulation taking effect, advisers used to get paid a commission for recommending open-ended funds, but not for closed-ended funds.
The RDR rightly put an end to these commissions. The Review was designed to improve transparency across the market, including in what advisers were allowed to charge their clients for their services. Since this took effect, demand for investment trusts has surged.
The Association of Investment Companies (AIC) recently reported that purchases via platforms of shares in investment companies by advisers and wealth managers hit a new record high of £260.8m in the second quarter of this year, up by 112 per cent from £122.7m during the same period in 2014 and up 108 per cent form the previous record high of £125.4m reached in the first quarter of this year. Annual purchases for the year end to quarter two of this year also reached an all-time high of £607.9m. Purchases totalling £286.2m in the first half of 2015 have already overtaken the total purchases of £81m in 2013.
Further details of sales over the past four years are shown in Table 2, which shows that purchases of investment companies through adviser platforms has consistently increased since 2012. Few platforms offered access to investment trusts in the past, so there remains a great deal of room for further growth.
Even if demand does steady out over time, this rapid change is no less impressive. Though as more trusts launch and existing trusts expand through increasing the number of shares available, it does not appear that investment trusts will slow down anytime soon.
A place for all
Advisers are not the only ones who have benefited from the greater demand for investment trusts. Providers have looked to capitalise on this interest by issuing more shares in existing investment trusts to meet demand, or by issuing brand new offerings.
The most headline-grabbing launch came from famed fund manager Neil Woodford with the Woodford Patient Capital trust launched in April. It was the largest ever investment company UK launch and a significant contributor to the UK All Companies sector becoming the most popular in the second quarter this year accounting for 19 per cent of purchases, up from 6 per cent in the first quarter.