New data shows adviser purchases of investment companies on adviser platforms reached an all-time high in 2017.
Good, but could do better. On the one hand, investment companies will be delighted that financial advisers bought almost £1bn of their shares on platforms last year according to new figures from the AIC; that was 46 per cent up on the previous year and 41 per cent more than in 2015, the previous all-time high for investment company purchases. On the other, £990m of sales looks quite modest compared to the £63bn worth of net fund sales of open-ended vehicles recorded last year according to the Investment Association, much of which came through intermediaries
Let’s not be churlish. It is clear that financial advisers are now embracing investment companies like never before. The consistent increase in intermediary interest in the sector since the retail distribution review levelled the playing field on commission payments six years ago has been heartening. Events along the way have accelerated the process – last year’s seize-up in the open-ended property sector, for example, underlined the value of the guaranteed liquidity offered by investment companies.
The AIC’s data, moreover, suggests advisers well understand the attributes that the closed-ended sector offers. Last year’s most popular sector with advisers was Global, where a number of strong performers provide advisers with a useful way to secure diversified exposure to international equity markets with a single fund. That was followed by UK property, where the structure of investment companies offers such important liquidity.
Advisers also focused on several income-oriented sectors, where investment companies enjoy advantages such as being able to retain income to build up reserves that can be used to support yield over time.
It would be unfortunate, however, if financial advisers regarded investment companies as a niche product to be used only in specific circumstances where an open-ended fund structure has shortcomings. The structural advantages of investment companies can certainly be valuable, but the broader question should be which fund delivers the performance required by the adviser’s client.
Here, investment companies have a strong record across the range. There have been numerous studies assessing the long-term performance of investment companies against comparable open-ended funds, with the former consistently coming out on top. The sector also makes a good case for active management – investment companies delivered an aggregate return of 110 per cent over the 10 years to the end of 2017, compared to 85 per cent from the FTSE All-Share Index.
Advisers making financial planning choices on behalf of clients must weigh up a number of different and often difficult considerations. But where they have decided on a course of action that requires investment in a collective fund to secure equity market exposure, the investment company industry has just as strong a case for providing that solution as the open-ended sector.
This isn’t to argue that an investment company will always be the right choice for advisers. But very often it will be – and not simply in cases where there is a particular need for liquidity, income or specialist exposure.
Only when that argument is accepted more broadly will the sector’s intermediary sales start to look more competitive against those of the open-ended industry.