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Rising stars

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.

The second most popular sectors were the Global and UK Equity Income sectors, which accounted for 16 per cent and 10 per cent of shares respectively in the second quarter, up from 16 per cent and 13 per cent in the first quarter.

Greater demand for investment trusts will need to be met with greater availability. One of the most common complaints by advisers about investment trusts previously was that they were not available on many platforms. Fidelity has been the most recent provider to answer this call - starting from early December Fidelity’s platform FundsNetwork will offer a broad range of the most popular investment trusts, as well as some exchange-traded products (ETPs).

Jon Everill, head of FundsNetwork advisory services, says, “Investment companies form an important part of the spectrum of products that advisers have available to them via platforms. In many cases their unique features and benefits suit particular clients extremely well. A combination of evolving client needs and more awareness of the different product types on the market is helping support a growing interest in investment companies.

“The RDR has reaffirmed the already well established requirement for independent advisers to consider a wide variety of investments for their client, including investment trusts,” Mr Everill continues.

Providers that will be added to the platform will include trusts from Aberdeen, Baillie Gifford, Invesco Perpetual, and JP Morgan, as well as all five investment trusts from Fidelity. Along with the ETPs, these new investments will be fully integrated with the existing range of services and will be available in the ISA, Investment Fund Account, and the FundsNetwork Pension.

Steady as she goes

The changes have not been as fast and furious for all areas of investment trusts. James de Sausmarez, director and head of investment trusts at Henderson, called the changes he had seen so far as “modest”, observing that many advisers are dealing less directly with investments and instead outsourcing this area of their business to wealth managers. Private investors have also been keen on investment trusts and are usually very well informed about what they are looking for in a trust.

Mr de Sausmarez says, “Among the adviser community there has been increased interest from independent financial advisers. Not purchases yet but this increased interest may lead to more purchases in the future.” He said that his priority is to grow existing investment trusts and make them more liquid by issuing more shares rather than launching new trusts.

Though it has taken advisers some time to turn to investments trusts this uptake in interest is not likely to wane anytime soon. Nick Britton, head of training at the AIC, cited the Woodford launch as one of the reasons that many are taking a new interest in trusts, but that even without the launch he has witnessed a great deal more demand.

Investment trusts can often allow access to some areas of investment that would otherwise be impossible. Mr Britton uses infrastructure as an example. Unit trusts can invest in the companies working on the infrastructure projects, but are subject to stock market fluctuations and other kinds of volatility that could affect the value of a company’s share. Investment trusts can invest directly in the infrastructure projects themselves, partially shielding the investor from some areas of market fluctuation.

The next steps will have to focus on adviser education. Between discounts, premiums, gearing and a limited supply of shares, investment trusts can be complicated entities. Mr Britton has conducting continued training both in person at events and meetings and through the AIC website, and even offers bespoke training to firms. “Really we take any opportunity to help advisers,” he says.

Advisers must recognise that investment trusts will likely play a beneficial role in most investors portfolios and should be examined accordingly. Though the incentive of a commission should, in morality, not have impacted their judgement before, it has no place now. While the current rate of expansion cannot realistically continue over the long term, it does not appear that it will slow down in the near future.