OpinionAug 5 2021

Advisers are falling in love with investment trusts

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Independent financial advisers have long had a love affair with unit trusts, or open-ended investment companies as they now are commonly called (how investor unfriendly, how unappetising, a title).

Years ago, commission had a lot to do with it, but I sense that the love affair is now seriously threatened.

Upset by the investment fund debacle that was Woodford Equity Income (an Oeic) and outraged over the long-term suspension of some high-profile commercial property funds (yes, Oeics again), more financial advisers are now casting their eye over what the investment trust world has to offer.

And it seems some seriously like what they see. As a result, puppy love – remember Donny Osmond’s "Puppy Love" in 1972? – is now blooming between selected advisers and investment trusts.

The latest data issued by the Association of Investment Companies confirms the strength of this blossoming relationship.

According to the AIC, purchases of investment trusts (stock market listed investment companies) on adviser platforms in the first three month of this year were a quarterly record. They totalled £368m, beating the previous record achieved in the fourth quarter of last year when purchases totalled £301m.

The buying of investment trust shares in the first quarter of this year, says the AIC, was done by 1,882 businesses (1,730 financial advice specialists and 51 wealth managers) – the highest number since the third quarter of 2016. The investment trust message is spreading like a smooth margarine.

For investment trust companies, which spend precious little money marketing their wares, these are encouraging figures.

Of course, the bounce back in equity markets after the sharp falls of spring 2020 has helped stimulate adviser interest, as have continued low interest rates, making saving (as opposed to investing) as appealing as an invitation to spend a night in Norman Bates’ Psycho motel.

The Woodford affair and prolonged property fund closures – now mostly lifted – have also played into the hands of investment trusts, showing some of the weaknesses inherent in the design of unit trusts. In a nutshell, open-ended investment vehicles are not suitable for the running of portfolios invested in illiquid assets (property, unlisted companies, infrastructure).

Compared to investment trusts that have independent boards, they can also suffer from poor oversight, allowing managers to stray very far from their mandates. No one strayed more in recent times than Neil Woodford at Woodford Equity Income.

The AIC has also played its part, waving the flag for its industry with much vigour. It has expended much energy and resource ensuring that advisers are better informed about closed-ended (not open-ended) funds. Even during the pandemic, the organisation has continued to educate (online) those advisers thirsty for more trust knowledge.

There is a lot to admire about investment trusts as creators of long-term wealth. For a start, some of them have been around since the 1860s and have never veered far from their mission to generate returns for shareholders. Steady eddies. Many have low ongoing charges and impressive records of sustained dividend growth going back 30 years or more.

Increasingly, trust boards are earning their fees by flexing their muscles on behalf of shareholders. When investment managers fail to deliver the shareholder returns expected of them, boards are wielding the axe and replacing them with new blood. They are also constantly demanding value for money from the managers, resulting in lower fees (in percentage terms) as a trust’s assets grow.

Of course, investment trusts are not without their fault-lines (occasional tame boards, some over-exuberant investment managers, and fees designed to over-reward the managers) or their particular complications (discounts and gearing).

And the split capital investment trust scandal of the late 1990s is a reminder that things can go horribly wrong when marketing is put before investment common sense.

So, let’s hope that under the new leadership of Richard Stone – former chief executive of Share plc – the AIC can keep impressing upon advisers the importance of embracing investment trusts within the portfolios they create for clients.

"Investment companies have a key role to play in enabling all investors to access a wide range of investments, including unquoted opportunities, in areas such as infrastructure and emerging biotech and green technologies," he said when being unveiled as the new AIC boss late last month.

"Investment companies have been delivering for investors for more than 150 years and today the industry continues to be a vibrant and growing one which has a lot to commend it to all types of investors."

Too right.

Advisers can find out more by visiting: https://www.theaic.co.uk/financial-advisers

Jeff Prestridge is personal finance editor of the Mail on Sunday