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Changes are afoot for the investment company sector

28 March 2013

How will the industry be more accessible to retail investors?

Jemma Jackson, PR Manager, Association of Investment Companies

Changes are afoot for the investment company sector, not least because of the Retail Distribution Review. Investment companies have for too long been the Cinderellas of the collective investment world, certainly as far as financial advisers are concerned.  This is despite their tendency to produce superior long-term returns (albeit with the potential for a bumpier ride along the way).    With commission now a thing of the past, and advisers required to at least consider investment companies if they are to remain independent, the sector should start to become more accessible to a wider audience.

Whilst we are not expecting fireworks overnight, all the tentative signs are that this is happening.  In January, the AIC received the highest ever inflow of traffic to our website, and investment company discounts are at their lowest in five years.  Also encouragingly, the sector broke the £100 billion barrier in terms of assets under management this year, and the sector is starting to see a pick-up in launch activity, perhaps not surprisingly considering the strong performance so far this year of the stock market.  Share issuance, particularly in the income orientated sectors, has also been strong and, given the sector’s strong dividend track record, it’s perhaps not surprising that more and more investors are turning to income orientated investment companies in the current low interest rate environment.

Ironically, investment companies have long been the natural home for sophisticated, self-directed private investors.  Whilst it would be wrong to suggest that it is just the absence of commission which has kept advisers away from the sector (some of the additional structural features such as gearing and pricing differences have clearly played a role), the history of demand for investment companies suggests that take up amongst advisers can only get better.  JPMorgan Asset Management, which is the market leader in investment companies in terms of assets under management, estimate that less than one per cent of their shareholder base comes from business through financial advisers, whereas a significant proportion is represented by direct private investors.  This is a miss match which is hard to square considering the investment company sector’s clear popularity with private investors ‘in the know.’

Whilst we are not expecting the floodgates to open overnight, RDR probably still presents the single largest long-term opportunity for the investment company industry. The AIC has trained 1,400 advisers over the last 18 months alone, and there is no sign of their appetite for training abating. Recent Citywire research suggested that 74% of advisers are planning on increasing their clients’ exposure to investment companies over the next 6 months to 3 years.  Liquidity concerns remain the biggest barrier to entry - 49% of advisers consider this the greatest stumbling block.  This is followed by gearing (48%), although conversely, gearing is also cited as the largest benefit of the investment company sector by 64% of advisers.  Discount opportunities are cited as the second most important benefit of the sector by 60% of advisers followed by competitive costs (44%).  But the key motives for advisers to invest in the sector are low cost active management (54%), proven performance record (34%) and choice (33%).

Another perhaps likely consequence of RDR is the rise of the self-directed investor.  According to research this year by YouGov, the changes brought about by RDR means that nearly a fifth (19%) of respondents are now more likely to arrange their own financial affairs. This may well also prove to be good news for the investment company sector.  The sector’s fan base amongst sophisticated private investors suggests that the more private investors know about investment, the more they tend to like investment companies. The AIC’s new website launched at the beginning of March, has been designed with retail investors and financial advisers in mind. It aims to provide investors, as well as advisers, with all the information they need on investment companies in a clear and user-friendly way.  The site is supported by a new glossary, which explains key concepts using clear, jargon-free text, graphics and videos.  Each AIC member company has a redesigned profile page, presenting key information in a more accessible way. The site continues to provide users with all the AIC’s statistical information, as well as topical news stories, videos and commentaries. Investors and advisers can also build their own bespoke ‘watchlist’ to keep a closer eye on companies they are researching.

There is also a dedicated area of the site for financial advisers which includes the AIC’s training programme, information on platforms that offer investment companies and other material designed to help them build portfolios for their clients which incorporate investment companies.  

We’ve also been listening to adviser feedback, and our greater clarity on gearing (borrowing) levels will be useful for both investors and advisers alike.  We are now publishing gearing in percentage terms, whereas previously we used a ratio. Secondly, we will be publishing the three year historic levels of gearing for member companies, allowing investors and advisers to gauge how actively gearing is used by the company. The third change helps advisers understand what the future gearing level of an investment company will be, allowing them to better measure risk.

Trends in the wider industry

Whilst the investment company sector has long been known for housing a good deal of funds with low charges, particularly amongst the retail orientated funds, it is clear that investment company boards are keeping a close eye on costs, and will be keen to remain competitive in a post RDR world.  A number of investment companies are not only changing their fee structures, but lowering them.

Most recently, a number of Baillie Gifford managed investment companies, Pacific Horizon, Edinburgh Worldwide, Baillie Gifford Japan and Baillie Gifford Shin Nippon announced charges would be coming down, as did Fidelity China Special Situations. Since taking over the management of Henderson Asian Growth, now renamed Asian Total Return, Schroders have simplified fees for the trust and waived them until September. Standard Life UK Smaller Companies scrapped its performance fee last year, and in 2010 a number of retail focussed investment companies abolished their performance fee arrangements, namely Schroder UK Growth, Foreign & Colonial, and British Assets Trust.

The year has got off to a good start for the investment company sector, and some of the positive changes we are starting to see may well have been informed by the retail distribution review.  In a low interest rate environment, many investors are finding that they have few places to turn to other than the stock market if they are to achieve a decent yield.  The key, as always, is holding your nerve when markets get bumpier –and some old habits are harder to change than others.  In the long-term, the investment company sector is well placed to benefit from some of the key changes that are happening post RDR.  But in the short-term, the performance of the stock market is likely to be the dominant contributory factor.

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