Andrew Bell, Chairman, Association of Investment Companies (AIC)
Ever since its inception in 1868, the investment company sector has been focused on meeting the needs of investors. Initially, it offered diversified exposure to overseas markets for the “smaller capitalists” who might otherwise have had difficulty cost-effectively accessing far-flung and difficult to research investment opportunities. Many of these characteristics remain as central in the 21st century as they were in the Victorian past. Although the ways investors can achieve exposure to investment markets have proliferated since then, the investment company structure remains a distinctive vehicle for investing, both for individual investors and larger institutions. It offers additional drivers for returns compared with open-ended funds and access to more specialised or illiquid asset classes where the closed-end structure enables the manager to take an appropriately long-term view.
In order to build on past successes, companies need to be innovative and efficient in delivering on the investment side, to meet (indeed to set) best standards for safeguarding investors’ interests and to communicate effectively.
Regulatory change has been a major focus for financial services over the past decade and 2013 is no exception with the expected passage into UK law of Europe’s Alternative Investment Fund Manager Directive (AIFMD). With any regulatory regime, a balance needs to be struck between protecting investors sufficiently and avoiding duplication or measures which are ineffective or unnecessary. Investors need a sensibly-regulated and properly functioning market. Whilst the motivation behind new rules is usually benign, it would be over-charitable to assume that the balance struck is always optimal.
The AIC seeks to help achieve good regulation (believing that what is good for shareholders is synonymous with its members’ interests) and actively encourages best practice by its members in complying with the resulting rules. The loss of trust in the financial sector over the past decade (partly self-inflicted by mis-selling events and partly circumstantial, given turbulent financial markets) needs to be restored. This is in the interests of savers who need to find better returns than those available from bank deposits. It is also in the business interest of those employed in the financial sector, where the UK has an established advantage.
The implementation of the Retail Distribution Review (RDR) this year is an important reform, which evens up the competitive field between the closed and open-ended sectors, by ending product provider incentives for new investments, as well as ushering in changes in the qualifications regime for financial advisers. Investment companies have an opportunity to appeal both to advisers who have not in the past invested heavily in the sector as well as to private investors, for whom the RDR changes may make investment advice harder to obtain, or who are unwilling to pay for advice that was previously covered by product provider trail payments. The quality of communication will be important, to explain the investment rationale for each company as well as to explain policies in relation to the use of borrowings (intended to enhance returns) and fluctuations in the price relative to net asset value (i.e. discounts).
The economic environment is likely to remain tricky, if less troubled than in recent years. With this backdrop, the investment company sector’s qualities of breadth of investment expertise, adaptability, attention to costs and good communication will be vitally important in building and maintaining relationships with new and existing shareholders.