Wealth managers still have an appetite for investment trusts
David Prosser explains why so many financial advisers are still fans of the sector.
Rumours of the demise of investment trusts as a tool for wealth managers appear to have been exaggerated. While there has been widespread concern that the wealth management sector has been turning its back on investment trusts, new research suggests many firms now plan to increase their exposure to investment trusts in the coming months.
A survey conducted by Research in Finance, based on interviews with discretionary fund managers who use investment trusts, found that 26% intend to add to their investments over the next six months. A further 63% intend to maintain their allocations, with only 11% expecting to cut back on their holdings.
The data undermines a narrative that has become prevalent in recent times – that wealth managers no longer feel comfortable investing in investment trusts on behalf of clients.
It is true that some of the largest firms are wary of adding smaller funds to their default investment strategies for clients, for fear of liquidity constraints causing problems when they try to make significant new investments. However, the Research in Finance study suggests many wealth managers still think investment trusts have a significant role to play.
In part, the study’s findings reflect opportunism on the part of wealth managers. More than two thirds of those planning to add to their holdings said they were attracted to the higher discounts at which many trusts’ shares currently trade relative to the value of their underlying assets. Discounts remain at unusually high levels compared to what has been typical over the past 20 years or so, creating an opportunity to invest at prices that could prove a bargain.
However, the sector also offers more fundamental attributes that appeal to many wealth managers. For example, more than half see the sector as the ideal way to increase exposure to more specialist assets – including illiquid asset classes such as infrastructure, real estate and private markets. More than a third point to the strong performance of certain trusts.
The data undermines a narrative that has become prevalent in recent times – that wealth managers no longer feel comfortable investing in investment trusts.
David Prosser
It’s also notable that 27% of wealth managers taking part in the study said they now have a generally more favourable view of investment trusts. That suggests the work done in recent times by many investment trust boards to drive shareholder value – from introducing discount reduction mechanisms to changing managers or even offering continuation votes – is paying off.
Overall, the Research in Finance study suggests that wealth managers’ attitudes towards the investment trust sector are more nuanced than is often suggested. And that makes sense. Many of them, even at the largest firms, reject the notion that liquidity concerns should see them steer clear, pointing out that there are many large – and highly liquid – investment trusts where the market can cope with large purchases or sales.
They also see the unique structure of investment trusts as ideal for exposure to asset classes that clients would otherwise struggle to invest in. That’s important given the widespread view that more investors could benefit from portfolios that include much more diversification – rather than relying on equities and fixed income assets, as has been the norm for so long.
Investment trusts will need to play their part, of course. Fund buyers will naturally steer clear of underperforming trusts, whatever asset class they’re in. But for many wealth managers, the best investment trusts still have plenty to offer.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
