Advisers turn to alternatives

So, we’ve established that advisers are putting more money into investment trusts. The next question of interest might be, which investment trusts?

In case you missed it, advisers’ purchases of investment trusts on platforms have risen 106% over the past three years, from £219m in 2012 to £453m in 2014. But over the time we’ve been doing this research on adviser platform purchases, we’ve also amassed a fair amount of data on where that money is going.

Two sectors – Global and UK Equity Income – vie for first place on advisers’ buy lists. From the beginning of 2012 to the end of March 2015, these were by far the most popular sectors in terms of net demand – purchases minus sales.

This suggests that the advisers who use investment trusts value them for their traditional benefits – well-diversified global and UK equity portfolios delivering consistent and rising dividends. It’s an approach typified by London firm Master Adviser, whose core investment trust portfolio includes such stalwarts as City of London, Merchants Trust and Foreign & Colonial.

But interestingly, the first quarter of 2015 saw a change in direction. There was a sudden drop in the relative popularity of both Global and UK Equity Income sectors among advisers, as they fell from first and second place in terms of net demand to fourth and eighth respectively.

Taking their place, the top three sectors in this three month period were Property Direct – UK, Infrastructure – Renewable Energy and Hedge Funds.

Now this could of course be a temporary blip – we’ll have to wait till the next quarter’s data to find out. But it does suggest that many are favouring sectors that can offer some insulation from a downturn in equity markets – property and infrastructure because of their ownership of real, income-generating assets, and hedge funds through a wide variety of investment strategies.

Supporting the notion that advisers may be wary of what has been a multi-year equity bull market, the UK All Companies sector, which has typically been among the top ten investment trust sectors for adviser demand, fell sharply to 24th place in the first quarter of 2015. The recent falls in UK and overseas stock markets on the back of the Greek debt crisis perhaps indicate that advisers’ caution might have been warranted.

Another interesting aspect of the data for Q1 2015 is that Infrastructure – Renewable Energy was more popular than its parent sector, Infrastructure. The main Infrastructure sector, with its offer of income that is less correlated with equity markets, has been highly sought-after in these days of near-zero interest rates. But this popularity has driven it to a double-digit premium (14 per cent); the renewable infrastructure sector looks cheaper at an average 6 per cent premium.

Contrarians may be more interested in the least popular sectors. Falling to its lowest rank since we started compiling this data in 2012 is Asia Pacific – Excluding Japan, which came 40th out of 46 sectors in terms of adviser net demand. The heyday of the sector’s popularity was in late 2012 and early 2013, when it hovered around fourth place, driven by the outstanding performance of funds such as Aberdeen Asian Smaller Companies and Scottish Oriental Smaller Companies, which have moved from premiums to discounts over the past two years.

Perhaps a surprising aspect to the first-quarter data is the relative popularity of the Global Emerging Markets sector, which was seventh by net demand, slightly more popular than UK Equity Income. While the asset class is out of fashion, this has provided the opportunity to buy funds on double-digit discounts. Investors in the sector remain convinced that its long-term merits will reassert themselves.

It will be interesting to see whether our second-quarter data sees mainstream equity mandates reassert their dominance, or whether advisers’ preference for more specialist offerings continues in the face of continued market volatility.