Wealth managers are shopping for bargains amid wide discounts, research shows

Discretionary fund managers (DFMs), also known as wealth managers, have increased their usage of investment trusts since 2020 and those who use trusts are looking to add to their exposure, according to Research in Finance.

Among all DFMs surveyed by Research in Finance¹, the percentage of business written in investment trusts has increased from 9% in Q1 2020 to 14% in Q1 2023. This was up from 12% in the previous survey covering Q3 2022.

In a separate study by Research in Finance of DFMs who use investment trusts², 24% expect to write more investment trust business in the next six months, 11% expect to write less, and 65% expect to write the same amount.

Of those who expect to use investment trusts more, the vast majority (95%) give attractive discounts as a reason. Other reasons DFMs are expecting to increase their use of investment trusts include the opportunity to take advantage of volatility (38%), strong performance of certain trusts (30%), desire for gearing (27%), increasing exposure to specialist areas (24%), and a more favourable view of trusts generally (24%).

Among the smaller number expecting to use investment trusts less, the reasons most cited include liquidity concerns, reducing exposure to illiquid asset classes, and greater use of passive funds.

The top sectors in which DFMs are planning to invest more are infrastructure (28% of respondents who named a sector), private equity (21%), global (20%), UK (20%) and property (19%).

Nick Britton, Research Director at the Association of Investment Companies (AIC), said: “These findings suggest that some wealth managers are increasing their exposure to investment trusts because of – not despite – widening discounts. The infrastructure sector, for example, which trades on a 19% discount, is the top sector on wealth managers’ shopping lists.

“History suggests that discounts at these levels don’t persist forever, and that periods of negative sentiment towards investment trusts can prove to be a good time to invest for the long term.”

Richard Ley, Founding Director at Research in Finance, said: “Over the years we have been researching DFMs and wealth managers we have consistently found investment trusts featuring prominently in their portfolios. There are certainly true fans out there who particularly favour the structure over open-ended funds, but we can see usage grow in the wider wealth manager space too.

“The current discount levels appear to have driven allocation to investment trusts upwards alongside a larger allocation to direct equities which has been a result of the attraction of specific stocks.

“We also know that investment trusts’ ability to use gearing is considered a positive when the conviction is especially strong for an asset class, geography, or a specific trust.”

A note on the data

The figures in this release are from regular surveys conducted by Research in Finance. This is the first time that the headline findings from these surveys have been released publicly.

For more information about the surveys, see ‘Notes to editors’ below or contact Research in Finance at [email protected].

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Notes to editors

1. The survey results in this paragraph are from the ‘UKAS’ study, a quarterly study of DFMs, wealth managers and investment advisers conducted by Research in Finance. The study was launched in 2017 and includes quantitative and qualitative elements. Fieldwork for the Q1 2023 study was conducted between 10 February and 27 March 2023. There were 120 DFM respondents to the quantitative online survey.

2. The survey findings quoted in this paragraph and in the remainder of the release are from the UK Investment Trust Study (‘UKITS’), which is conducted twice a year by Research in Finance among DFMs who use investment trusts. There are quantitative and qualitative elements to the study, with fieldwork for the most recent quantitative survey conducted between 15 May and 20 June 2023.

3. The Association of Investment Companies (AIC) represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s vision is for investment companies to be understood and considered by every investor. The AIC has 347 members and the industry has total assets of approximately £264 billion.

4. For more information about the AIC and investment companies, visit the AIC’s website.

5. For more information about Research in Finance, visit https://researchinfinance.co.uk.

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