New heights

Call it modesty or self-deprecation, but we have a habit of snatching defeat from the jaws of victory in the UK. The reporting of the latest investment company sales figures in recent days has been a case in point: several accounts of how purchases of closed-ended funds by financial advisers and wealth managers hit a record high in the first half of the year suggested this was further evidence of irrational exuberance amongst stock market investors.

Now, there is a perfectly valid discussion to be had about global stock market valuations. Those who believe bull markets are beginning to run out of steam are entitled to their view and make an articulate case. More optimistic analysts disagree with them.

However, the implication that advisers and wealth managers are somehow blindly buying investment companies as they seek to cash in on stock market gains any way they can is wide of the mark. Investment company sales are naturally buoyed by investor confidence, but the sector is performing strongly in its own right for several important reasons.

Not least, there is the ongoing education campaign that the Association of Investment Companies has managed across the UK, bringing financial advisers up to speed on the merits of closed-ended funds following the retail distribution review reforms of 2013. While those reforms got rid of the incentive for advisers to favour open-ended funds, the AIC reasoned that they wouldn’t switch to investment companies if they didn’t know anything about them. Now they do.

It’s instructive to look at the best-performing sectors in terms of first-half sales. Global funds were up there, with the sector featuring a number of highly-respected vehicles, but it has been a perennial favourite. More interesting is the enormous popularity of property funds during the first six months of 2017: this is almost certainly a consequence of the suspension of several open-ended property funds in the market panic that followed the Brexit referendum last year amid concerns about liquidity; advisers have realised that a closed-ended fund structure is much more appropriate for investing in illiquid assets.

On a related note, very strong sales of private equity funds were also a significant factor in the investment company sector’s stellar first half. Closed-ended funds provide an opportunity for retail investors to secure exposure to an asset class that has previously been off-limits to them.

Consider, too, the popularity of equity income funds, which also buoyed the sales figures. In this ongoing period of low interest rates, investors prepared to take on risk have looked to the stock market to boost yield; investment companies, with their ability to smooth income through prudent management of reserve funds, offer the potential for secure, sustainable and increasing income – witness the significant numbers of funds that have increased their dividends in each and every year going back decades.

In other words, what we’re seeing in the investment company sector sales figures is not blind optimism. Rather, the record sales of the first half reflect the fact that closed-ended funds are competing on a level playing field and advisers have a better understanding of how to make the best use of the sector. Yes, sales would no doubt be lower had financial markets performed less strongly in recent times. But let’s not be too curmudgeonly to give credit where it’s due.