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.