Advisers feeling the love for investment companies

Financial advisers have learned to love investment companies. There was a time when intermediaries largely steered clear of the sector, preferring open-ended funds and the commissions they offered. Today, a decade after regulators vetoed such payments, the playing field is level, and many advisers have become enthusiastic investment company buyers on behalf of their clients.

The latest data underlines the point. Sales of investment companies on adviser platforms totalled £361m during the second quarter of the year, 20% more than in the same period a year previously – and the second highest figure on record. Net demand was £151m, a figure also bettered only once previously.

Those purchases came from advisers large and small, with more than 1,900 firms investing over the three months to the end of June, including 50 wealth managers, a five-year high. And this buoyant demand needs to be set in the context of the difficult market environment we have seen this year; indeed, total fund sales on adviser platforms during the second quarter were actually down 5% on 2021.

Several factors underpin this surge in demand. First, at a more general level, advisers’ understanding of investment companies has increased exponentially over the past decade. With that has come a rising appreciation of the sector – not least for its superior long-term performance track record – and that is continuing.

More specifically in the current circumstances, investment companies offer much that is attractive to advisers. First, the industry offers a much wider choice of asset classes. It’s no coincidence that the most popular sub-sector of all with advisers over the second quarter was Flexible Investment. The managers of these vehicles have a remit to invest widely, well beyond equity markets, offering valuable protection and diversification.

Commercial property-focused investment companies, often structured as REITs, were also in demand over the quarter. Advisers have increasingly come to recognise that investment companies provide the ideal route into more illiquid asset classes, providing daily dealing in areas of the market where the underlying portfolio holdings cannot be quickly bought or sold. A series of difficulties with open-ended property funds, which lack the same advantage, has really brought home this point.

In addition, advisers are getting to grips with investment company discounts. The fact that the structure of an investment company means its share price sometimes trades at a discount (or a premium) to the value of the underlying assets has long been touted as a complexity that advisers and their clients could do without. But as understanding of the sector has grown, this concern has eased.

Indeed, many advisers now regard investment company discounts as a potential opportunity to buy assets cheaply. For example, demand for smaller company funds over the second quarter was very strong, with advisers clearly attracted to a sector where discounts have been unusually wide in recent months.

Then there is the income story, with UK Equity Income fund purchases again to the fore. Indeed, the advantages of investment companies from an income perspective has been a huge driver of interest in the sector. Funds’ unique ability to build up dividend reserves with which to sustain payments to shareholders during leaner periods – to smooth distributions, in other words – has been enormously valuable during this ongoing period of historically low interest rates.

All these drivers – and more, including the governance strengths of investment companies and the consistency of their performance – have contributed to a resurgence of interest in the sector. Advisers still have some concerns. The larger firms, in particular, worry about moving investors en masse into smaller investment companies for fear of moving the price. Overall, however, the sector’s relationship with intermediaries has not looked so healthy for many years.