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For as long as I have worked in the investment world I have heard how fantastic investment trusts are and how they are often ignored or misunderstood, or simply didn’t pay a commission to advisers. Whatever the reasoning investment trusts have never really made the main stream, but could this be changing? Have the stars finally aligned to allow these closed ended cousins of the more commonly spotted OEICs their time in the spot light?
I actually think a tipping point may have been reached. The stars I refer to include the much discussed and much maligned RDR. For an adviser to remain “independent” they must consider all options that could be suitable for their clients and also perhaps given the fact that now more advisers are working on fees not commission the playing field has perhaps levelled off.
Behind the regulatory change, the trade press appears to have aided the cause for investment trusts. Through our press monitoring insight tool, the RiF Tracker, we can see that during September 2013 the sector that received the most positive press from the trade magazines was, yes you have guessed it, the investment trust sector. Not only that and, perhaps even more significant, is the fact that the sector had the most coverage overall, knocking the UK All Companies and UK Equity Income sectors off their perch as most talked about sectors.
The increased availability via the preferred buying point for advisers, the platforms, is perhaps the most significant factor. Figures in the first half of 2013 would appear to confirm this assumption. Sales of investment trusts, via platforms increased by around 50% in that period, compared with the same period in 2012 according to the AIC (Association of Investment Companies) whose data feed comes from six platforms, including Transact and Ascentric, of which account for 90% of the sales of investment trusts throughout 2012.
Many advisers have signed up for “training” on the products highlighting that until now they have been off their radar. Advisers still in the game now are a new breed working in a new world or advisers that have long held many of the beliefs now more the norm. This increased demand for knowledge indicates that there is a desire to learn and to offer the best products for their clients. A noble quest and one that was long overdue to grant those true “professionals” with their clients’ interests at heart the kudos they deserve.
With the news of Neil Woodford’s imminent departure from Invesco Perpetual it is obvious that one of the real advantages of the closed end strategy is the stability of the asset base. Investment trusts don’t have to contend with continual asset inflows and outflows, the share price is fixed by the market freeing the manager to pursue a strategy without fear of enforced sales of holdings if investors choose to cash out.
That news I mention of Woodford’s career move will probably move investment trusts off the front pages over the coming weeks, but as that story resolves itself I fancy a continual rise in investment trusts and more converting to the closed end strategy.
If you go into any shop selling electronic goods and you purchase, for example, a radio and that product fails there is a standard course of action, as a consumer, you can take. In the past, if the item broke within a year you took it back to the shop and they usually repaired or replaced it. However, now it is far more common that if you buy a radio and it fails the liability is with the manufacture not the distributor.
This is appears to bear a resemblance to the emerging view from the FCA in the world of retail investments. There is a hint that in future the liability relationship between the private investor and adviser is shifting. It would seem more and more of the accountability could lie with the asset managers themselves, despite often having zero contact with the end consumer themselves - like the radio example. This is of course a simplification of a complex debate, but raises some interesting questions. Especially, with regards what level of understanding an investor must have to grasp actually what they're buying.
Arguably, the adviser should be able to explain the product in a clear and concise manner but if the client themselves is unsophisticated and requires, or indeed, has the capacity to invest in complicated products to achieve their desired outcomes - what happens then? Would there be a level of expectation on the fund information to explain in a full, fair and simplistic way what is being brought? By simplifying the language used to describe the basics of the product is that going to undermine the spirit of exercise – meaning, by making it easy to understand the product you make it feel like a simple investment? Could this also mean that actually the product range on offer is going to be a lot less complicated and for the regular punter there will be a whole raft of very plain, unexciting funds to buy. Is there a danger that there is also a mismatch with the investor’s appetite for an outcome and what they can actually buy.
Understandably, this is an incredibly difficult judgement to make work for every scenario, but it does put the customer’s interest as the primary concern which is clearly good. But, possibly at the detriment of gaining exposure to a wider set of products which might be what the end customer requires.
At Research in Finance we will be reviewing this closely over the coming months as part of our industry outlook - look out for further posts.