Fans and sceptics

Investment trusts are now the ‘hipsters of the investment world’, according to a recent piece in the Financial Times.

Well, leaving that aside, it’s certainly true that they are used far more widely by advisers than ever before. Research into adviser platform purchases from Matrix Financial Clarity shows that over 1,600 firms are now buying investment companies on behalf of clients – roughly treble the number that used them before RDR.

But these bare numbers tell us little about why or how advisers are using investment companies. A survey of 290 advisers conducted by Unbiased on behalf of the AIC provides more insight.

Of the survey sample, 35% used investment companies in their own portfolios, and 43% used them in clients’ portfolios. When I meet advisers, I still find the odd one who holds investment companies in a personal portfolio, but does not use them for clients. But the survey provides no support to the idea this is a general trend. And that is a good thing: any investment that advisers feel happy about including in their own personal portfolio, should surely be one they are happy to recommend to clients with similar investment objectives.

But the survey suggests we still have work to do. A majority of advisers in the survey do not use investment companies.

The ‘super-users’

Of those who use investment companies, the majority put up to 10% of their own personal portfolio into them, and the same is true when investing for clients. But the survey also reveals a group of ‘super-users’, those who are such fans of investment companies  that they make up more than a tenth of their own personal portfolio (19% of all respondents), and/or more than a tenth of all client assets (18% of all respondents). These are minorities, but sizeable ones. We know many of these individuals and firms well, and they are some of our strongest advocates. Most have been investing in investment companies since pre-RDR days. I suspect there are a few of them among the readers of this article.

Changing attitudes

One of the most interesting aspects of the survey is the light it throws on advisers’ perceptions of investment companies. A former boss of mine used to say ‘Perception is reality’, by which I think he meant that his perception was always right, but there’s a grain of truth in the saying.  The views of advisers – who have mostly been round the block a few times and have great practical experience of investments – really matter.

The biggest barrier to recommending investment trusts, cited by 40% of survey respondents, is gearing. It could be argued that the ability to borrow to boost returns is an advantage, and indeed 22% of respondents see it that way. But they are outnumbered by those who clearly have hesitations in recommending geared investments to clients.

The first two points I always make about gearing to advisers is that average levels of gearing are moderate across the industry (about 7% on average, and that hasn’t changed much for several years), and about half of investment companies (excluding VCTs) have zero gearing. Gearing is more moderate than many think. Nevertheless, we may need to do more work on explaining how gearing works so that the risks and potential benefits can be more fully appreciated.

On this note, it’s encouraging to see that the second biggest barrier to advisers recommending investment companies is that they acknowledge their need to build their knowledge in this area. I love to hear this, and not only because it keeps me in a job. We try to be as approachable and available as possible – and if we aren’t reaching you or your region, let me know and I’ll make a special effort to get out there. We’re also launching a comprehensive programme of online training next year that will help even more advisers improve their understanding of investment companies.

We didn’t just ask about barriers, but also what advisers felt were the biggest benefits of investment companies to their clients – or potential benefits, for those who do not yet use investment companies. The major perceived benefits are strong long-term performance (59%), competitive fees and charges (50%) and ability to invest in a wider range of assets (44%).

Interestingly, discounts and premiums, which are seen as a barrier by 17% of respondents, are welcomed as an opportunity by 39%. So, of the two major differences between investment companies and open-ended funds – discount/premium pricing and gearing – the first is seen as a net positive, the second as more of a concern. This dual nature of investment companies is reflected in our training. The benefits and the risks are two sides of the same coin.

Adviser perceptions are a moving target. The recent problems experienced at several open-ended property funds have encouraged 16% of respondents to consider property investment trusts or REITs for the first time (this is in addition to the 13% of respondents who already use them).

There will always be market developments outside our control that will influence investors to plump for one structure or the other. What we’re working towards is a world where advisers will have no inbuilt bias towards open-ended or closed-ended structures, but consider each on its merits and compare across the two universes – on fees and charges, performance, suitability, gearing policy and any discount/premium for the investment company. Many individual advisers and firms have already reached this destination, and I look forward to helping others on the journey.