Ian Sayers blog: A better home in uncertain times?

Looking back on 2016, there can be few years where the prevailing consensus has proved to be so wrong, so often.  Indeed, many predicted a torrid time for markets in the aftermath of Brexit and a Trump victory.  Yet in reality markets have held up well. 

Closer to home, the investment company sector continued to build on the success it has seen over the past three years, with assets reaching another all-time high during 2016.  In August, the sector’s assets broke through the £150bn mark for the first-time, an achievement even more remarkable as it only passed £100bn in January 2013.

There are many reasons for this growth, but one key driver has been the sector’s ability to access specialist income-producing asset classes, combined with its unique ability to maintain and increase dividends in both good times and bad.  However, before we get ahead of ourselves, we should bear in mind two things. 

Firstly the sector has benefitted considerably from the fall in the value of sterling, given its significant worldwide exposure, and such gains can disappear as quickly as they arose.  More importantly, though, the sector does not exist to grow simply for growth’s sake.  We exist to deliver returns to our shareholders.

So I am even more pleased that, in addition to these unprecedented levels of demand, the latest figures for the November show the average investment company significantly outperforming the FTSE All-share over 1, 3, 5 and 10 years, delivering strong positive returns for shareholders across all these periods.

With a year like 2016 nearly behind us, few of us would feel confident about making predictions about what the future holds in 2017.  However, with interest rates cut yet again post the referendum result, I cannot see the demand for income waning any time soon.  But I also wonder whether 2017 will be the year when the merits of the closed-ended structure receive true recognition.

When I first got involved with the sector some 20 years ago, the distinction between a closed-ended and open-ended fund was often seen as something of a technical nuance.  Difficulties in the open-ended property sector this year, where many funds had to close to redemptions or reprice as investors looked to exit this asset class, has reminded many of the genuine advantages of holding illiquid asset classes in a closed-ended structure.

It is one of the reasons why, in our regular research on purchases by financial advisers through platforms, the Property - UK sector was the most popular sector for the first time since we started gathering this information.

Of course, this structural advantage should be balanced against the fact that that gearing and discounts can add to short-term volatility and magnify losses.  But my own view remains that, in these unpredictable times, it is better to have managers focussed on maintaining the best possible portfolio for the long-term, rather than having to keep one eye on current investor sentiment in case there is a rush for the door.

As always, there are arguments on both sides but I sense there is growing recognition that building the best possible long-term portfolio is not simply about what you choose to invest in, but also which structure you choose to do it with.

But whatever you decide, I hope that 2017 is a prosperous year for you, and perhaps also a little more predictable!

Ian Sayers is Chief Executive at the AIC