Investment companies in the limelight

When times are tough, it can be difficult to stay positive. But there is an irony at the heart of the travails that the investment companies sector has suffered over the past year, a period during which many funds’ share prices have slipped to significant discounts to the value of their assets. Market sentiment may have been bad news for valuations, but there has never been more interest in the sector.

An announcement from the investment consultancy and research company Square Mile is a good example. From this month, it is adding investment company ratings to its “Academy of Funds” recommendations. So far, 18 funds have made it on to Square Mile’s list; more are expected to join them in the coming months.

It’s another reminder of how far the sector has come over the past decade or so. For years, investment companies were barely mentioned by consultants, analysts and advisers, with all the attention going to their open-ended fund peers. Regulatory reforms, which prevented open-ended funds from paying financial incentives to intermediaries, prompted a reappraisal of the sector. Investors have returned, attracted by strong performance, competitive charges and structural advantages, particularly for income seekers.

Today, no self-respecting fund platform would not feature at least some investment companies on its buy lists. And for investors seeking to choose funds for themselves, the research and analysis online continues to expand – much of this material is available free of charge.

There is, of course, the AIC’s own website, which makes it easy to compare performance figures and screen for funds using a variety of different criteria. But there are also independent groups publishing valuable data and analysis – QuotedData and Edison Group are two good examples. The traditional broker analysts – firms such as Winterflood and Stifel – also make useful contributions, with much of their material publicly available.

This coverage is important. It not only ensures investment companies are in the public eye but also helps investors to make informed decisions for themselves. There was a time when public information and analysis of the sector was almost non-existent – so even investors who saw the attractions of investment companies found it difficult to assess individual funds.

The bottom line is that investment companies have become mainstream holdings for many investors. There is no longer anything unusual or esoteric about buying investment company shares, rather than putting your money into an open-ended fund. Indeed, research has suggested that many of the most successful retail investors – at least those with the largest portfolios – tend to favour investment companies over other types of vehicles.

This shift bodes well for the long-term sustainability of investment companies, but it also provides a potential short-term benefit. The interest in the sector gives reason to be hopeful that it can put its current problems behind it more quickly than might once have been possible.

In the past, very wide discounts have put people off investment companies. Today, by contrast, a growing number of investors are focusing on the opportunity that these valuations could present. There is increasing analyst – and press – coverage of funds with excellent long-term performance track records that currently trade very cheaply by historical standards. As people seek to exploit these discrepancies, discounts will narrow.

The bottom line is that despite the problems of the past year, investment companies are in a far better place than a decade or so ago. And now might just be the moment to take advantage of the vagaries of market sentiment.