The head of fund selection for Barclays Wealth’s £15bn wealth management unit says liquidity concerns mean he can never buy investment trusts for client portfolios.
The £15bn relates to the amount of client capital held in active funds by Barclays Wealth clients, with additional capital being held in passive investment strategies and derivatives.
Ian Aylward, who has been head of manager and fund selection at Barclays Wealth and Investment Management since 2016, and prior to that held a similar role at Aviva, said: “The problem is clients are put into model portfolios. And as we manage a lot of capital, we have to feel confident we can move client money into and out of investments as people move money in and out, and new clients come on board.
"And the issue with investment trusts is that there may not be the liquidity to do that, or to do it in the way that is in the clients' interests.”
He added: “Our decision on this is pragmatic and operational, there are certainly many very good fund managers out there that one can only invest in via investment trusts, but with treating customers fairly in mind, we need to be able to buy across all of the model portfolios, we cannot be wondering if a trust is liquid enough for us to be able to make the trade we want.”
Because investment trusts are listed on the stock exchange, there are a finite number of shares in circulation, thus a large buyer or seller could cause the share price to move markedly.
This creates a situation where, for example, an investor might think the shares of an investment trust are a good buy at £1, but if they buy enough of them, the share price moves to £1.50, and they may regard this as a less attractive investment.
The dilemma for large fund buyers, such as those at Barclays, is that if one new client buys, this has the capacity to move the share price, and could mean the next client doesn’t get the same exposure as the previous one, despite them both being in the same model portfolio.
Among the funds owned by Aylward is a UK equity mandate which is managed by Nick Train.
Barclays has a segregated mandate with Train’s firm, and get the same sort of exposure that retail investors get via Train’s UK equity investment trust, Finsbury Growth and Income.
Train’s trust has suffered recently, something the fund manager attributes to the vaccine roll-out making investors keener to own more economically cyclical stocks than those he owns in his portfolios.
The Finsbury Growth and Income trust has gained about 10 per cent in the past six months (a period roughly correlating to the discovery of the first vaccine) compared with a return of 36 per cent for the average trust in the AIC UK Equity Income sector in the same time period.
This recent underperformance doesn’t concern Aylward however, who said: “We would always want to have a balance of growth funds and value funds, knowing that each can enjoy a period of strong performance. The aim is to have the best of each. We are very comfortable with Nick’s positioning and long term style.”
Ben Yearsley, investment director at Fairview Consulting, said: “I’m a big fan of investment trusts, but you have to be aware of the downsides, and liquidity is a downside.
"But for a smaller adviser, who has a client with £250,000 and is looking to invest in 20 different funds, liquidity is not an issue, and investment trusts work.
"They can get exposure to some very good trusts. I am a big fan of Nick Train and investors should not worry about recent performance. In fact it may mean now is a good time to get into a product run by him.”
Nick Britton, head of intermediary communications at the Association of Investment Companies, a trade body for investment trusts, said:
“It is true that large model portfolio ranges can struggle to use investment companies due to their liquidity needs and desire to avoid becoming significant shareholders. However, it’s a matter of perspective whether you see that as a shortcoming of investment companies, or a downside of large model portfolios, which might be missing out on opportunities for diversification, exposure to less liquid asset classes, or simply a wider choice of investments.”
While unwilling to invest in closed-ended funds, Aylward is comfortable with investing in smaller funds, and with seeding new funds, though said he was wary of owning too much of any fund for liquidity reasons.
A feature of the Barclays Wealth and Investment fund selection process is the presence of an “operational due diligence team”, whose role is to flag up concerns about funds which Aylward and his team might select.
The due diligence team has the power of veto over any of the funds chosen, and among the criteria it is looking for are key man risk, cyber security risk, and regulatory risk.
david.thorpe@ft.com
