Seven reasons to invest in an investment company this year

Investment companies are enjoying a purple patch. Closed-ended funds raised more than £5bn from investors last year according to the Association of Investment Companies, more than in any previous year.

Investment companies aren’t for everyone, since the assets they buy won’t suit the risk profile of all investors. But if you are considering stock market investment for the year ahead – or other assets where a closed-ended fund is one way to get exposure – there is a long list of good reasons why an investment company could be the best option (and why the sector is now so popular).

Competitive costs

Investment companies have long restricted in paying sales commissions to financial advisers, so they’ve historically been cheaper than other types of investment funds, which have had to factor such expenses into their fee structures. Now all funds are barred from paying commissions, costs are coming down, but many investment companies have responded by cutting their fees even further.

Strong performance

Past performance doesn’t tell you what will happen in the future, but looking back, investment companies have an excellent track record relative to their peers. Aided by some of their structural advantages, investment companies outperformed open-ended funds in 12 out of 15 sectors over the five years to the middle of 2015, and repeated the trick in nine out of 15 sectors on a 10-year basis.

Good record on income

Investment companies are allowed to retain income in good years in order to fund pay-outs during times when dividends are harder to come by. This means they can offer a stream of consistent income payments to investors. More than a fifth of closed-ended funds that have been around for more than 10 years have raised their dividends for at least 10 years in a row. A growing number of funds have done the same thing over three or more decades.

Structural certainty

Investment company managers have an advantage over their peers at other types of fund: they know exactly how much money they have to manage and that this sum will not vary each day. Closed-ended funds have a fixed number of shares in issue; by contrast, open-ended funds issue shares when investors want to buy and cancel them when investors sell. As a result, the manager has to worry about inflows and outflows of funds, as well as the underlying assets.

Independent board structure

Investment companies are stock market companies run by independent boards. Just like any other board, these boards have a legal duty to safeguard shareholders’ interests. If performance disappoints in some way, they must hold the fund’s manager to account – managers can be hired and fired if this is deemed necessary.

Ability to take on gearing

Gearing boosts returns when markets are rising, but only investment companies are allowed to borrow money in order to invest in this way. If you’re investing on the assumption that asset prices will rise, gearing is therefore an attractive way to boost your returns.

Ideal for specialist investment

Investment companies’ fixed number of shares in issue makes them a good way into specialist asset classes where holdings may be illiquid. Open-ended fund managers feel nervous about such assets since they can never be sure about when they might have to sell in order to meet the demands of investors wanting to take their money out of the fund.