A more level playing field

With purchases of investment companies by advisers and wealth managers having reached a record level, David examines the rise of the closed-ended structure.

It seems a long time ago now that advisers routinely ignored the investment companies sector; research published this week by the Association of Investment Companies shows intermediaries bought £777m worth of closed-ended funds over the year to the end of March, more than ever before in a 12-month period. In the first quarter of this year alone, adviser purchases of investment companies totalled £246m, the second highest quarterly sum on record.

Much has changed since the retail distribution review (RDR) four-and-a-half years ago. Back then, of course, advisers were incentivised to choose open-ended funds over investment companies because the former paid commissions while the latter couldn’t. Once the playing field was levelled, advisers began to pay more attention to the superior performance records and lower fees of many investment companies, aided, it must be said, by the AIC’s efforts to educate and train a whole generation of intermediaries on the workings of the sector.

We are not yet at a stage where investment companies command the same level of commitment from advisers as open-ended funds. Flows into the latter are still substantially higher and likely to remain so for the foreseeable future for a variety of reasons, ranging from liquidity issues to access through platforms, as well as the obvious point that there are simply more of them.

Nevertheless, it is finally beginning to feel as if investment companies are an ordinary and mainstream holding for most advisers – that they’re considering the sector’s best funds for all their clients as a matter of course, rather than just for a small group of more sophisticated investors.

The breakdown of the AIC’s data, compiled with the help of Matrix Financial Clarity, also makes interesting reading. It reveals that the debt fund sector was more popular with advisers than any other during the first quarter, followed by direct property, which had topped the sales rankings during the third and fourth quarters of last year.

That suggests advisers have often been choosing investment companies for the structural advantages that they offer when providing exposure to certain asset classes – particularly those where liquidity is a consideration. The travails of investors in open-ended property funds last year, many of whom saw their vehicles closed for a period as the property market panicked in the wake of the referendum vote, have clearly opened investors’ eyes to the attraction of investment companies in this regard.

Encouragingly, however, the next two most popular sectors during the first quarter of this year were Global and UK Equity Income, homes to more conventional equity funds. It would be a shame if advisers only used the investment company industry to offer clients exposure to alternative or illiquid asset classes when there are so many excellent closed-ended funds invested in UK and international equities. All the more so given the income advantages the sector boasts, which are so valuable during this ongoing period of incredibly low interest rates.

Slowly but surely, it would seem, advisers are becoming structure-agnostic, content to pick the best fund for the job they need doing for an investor, irrespective of whether it is open or closed-ended. Long may that trend continue – not because investment company industry executives will be pleased that sales have tripled since 2012, though no doubt they will be, but because this is the right outcome for clients.