The introduction of the Retail Distribution Review in 2012 has fostered client interest in investment trusts, but some in the industry believe the availability of these products on platforms needs to improve further.
RDR led to an increase in private investors purchasing investment trusts, also called investment companies, according to many commentators.
Prior to RDR, advisers would receive commission on open-ended funds.
RDR removed commission for advisers, making the cost of financial advice more expensive to clients, and increasing the level of qualifications financial advisers were required to hold, as well as making it compulsory for advisers to be upfront about whether they provide restricted or independent financial advice to their clients.
Client interest
Pascal Dowling, partner at Kepler Partners, says: “[RDR] has left many smaller investors to fend for themselves and the consequence of that has been that investment trusts have seen a dramatic uptick in investor interest.”
He adds: "Four of the five largest buyers of investment trust shares in the UK since 2012 have been retail platforms, and trusts such as Miton Global Opportunities have seen their shareholder base transformed, moving from 9 per cent to 44 per cent held by private investors in the last two years.”
Several others in the industry share the same view.
Nick Britton, head of intermediary communications at the Association of Investment Companies (AIC), explains: "Investment companies have strong long-term performance.
"Over the last 10 years to the end of February 2019 the average investment company is up 299 per cent in comparison to 156 per cent for the average open-ended fund.”
Mr Britton also explains how the premiums of investment companies, a bellwether of investor interest, have been increasing.
If the share is bought at a higher price than the net asset value, then the investment trust is said to be trading at a premium, and if it is below the net asset value then at a discount.
A shrinking discount indicates higher client interest.
Mr Britton adds: “Over the last decade the average investment company discount has narrowed significantly from 15.6 per cent in 2009 to 1.38 per cent today, demonstrating the increased demand for investment companies over the last 10 years.”
Availability on platforms
Since RDR, purchases of investment companies on adviser platforms have increased five-fold. Purchases amounted to £219m in 2012 and this grew to just under £1bn in 2018, data from the AIC shows.
But according to the AIC, open-ended funds still remain a more popular choice on platforms compared to close-ended funds.
James Budden, director of retail marketing and distribution at Baillie Gifford, believes open-ended funds are more popular because of the lack of availability of investment trusts on platforms.
He points out: “A lot of platforms do offer investment trusts, but the two biggest, Cofunds and Quilter, do not.
"They account for 40 to 50 per cent of IFAs' first choice platforms, though a lot of second choice platforms do hold investment trusts.”
Mr Britton suggests: “Investment companies are now available on the vast majority of adviser platforms, with Transact, Ascentric and Alliance Trust Savings seeing particularly high volumes of purchases."
He expects Aegon, which acquired Cofunds in 2017, to make investment companies available to former Cofunds customers soon.
But Mr Britton highlights other barriers to advisers using investment companies in client portfolios.
He cites a report written in 2018 by consultancy firm The Lang Cat, which identifies a structural bias towards using open-ended funds in discretionary fund managers’ multi-asset portfolios that advisers rely on.
How to increase adviser engagement
So are the issues associated with platforms the only barrier to the uptake of investment trusts among advisers?
Tim Morris, financial adviser at Russell and Co Financial Advisers, says: “I don’t recommend that many [investment trusts to clients].
"The reason being, the costs compared to some passive funds out there nowadays means you can be looking at an ongoing cost differential close to 1 per cent per annum.”
Mr Britton notes: “Many financial advisers are less familiar with investment companies and lack confidence in recommending them.
"Some of investment companies’ features, like gearing, discounts and premiums, and the fact that investment companies are market traded, can be unfamiliar.”
Mr Budden reiterates this point: “Some deep-rooted concerns and prejudices exist around investment trusts. They are seen as more risky because they can plough money and there is a lack of understanding around premium and discount levels."
Mr Budden adds: “If markets are going down, investment trusts are at a premium. Paying something above the NAV is something that can worry people.”
The AIC continues to offer free training to financial advisers and wealth managers on investment trusts to understand key concepts, such as NAV and gearing.
Mr Britton says: “The AIC is running 15 adviser training workshops around the country in May and June and there are six investment company training courses up on the AIC website.
"All of the AIC’s training is free of charge and is accredited by professional bodies, such as the CII and CISI.”
But for Mr Budden, distribution is the key issue.
"Investment trusts are not available across all intermediaries’ platforms. They are available on platforms that can take direct equity investment. If you do not have that facility you cannot hold an investment trust,” he warns.
He adds that it is vital for every platform to offer investment trusts in order for the sector to grow further.
saloni.sardana@ft.com
