A word on advice

The resurgence of the investment company sector over the past few years is often seen as having been driven by the retail distribution review reforms that came into effect at the start of 2013; with financial advisers no longer able to earn commissions on fund sales, they’ve had greater incentive to invest clients’ money across the whole market, including in closed-ended funds. Interestingly, however, clients themselves appear to have caught the investment company bug too – many funds are reporting an uptick in interest from investors buying direct.

A recent FT Adviser report makes exactly this point, confirming a trend that has been evident in fund platform sales statistics for some time. Amongst investors buying funds direct, many more are now choosing investment companies than did so in the past.

One consequence is that sole investment companies have seen significant changes on their shareholder registers. Merchants Trust, for example, says that the proportion of its shares owned by private investors has risen from 17 to 25 per cent over the past two years.

This is likely to mean investment companies think much harder about the needs of the direct investor audience in the months and years ahead – both to accommodate the interests of shareholders already on their registers and to ensure they attract new investors.

Moreover, this is a theme that will interest a very wide range of funds. As FT Adviser points out, the adviser community is most excited by the potential of investment companies to offer exposure to alternative assets, ranging from property to infrastructure, as an attractive source of yield; direct investors, by contrast, appear to be interested in funds from across the whole sector, including mainstream and conventional equity vehicles.

We should not be surprised by that; indeed, it should be food for thought for those advisers who consider the investment trust sector only in the context of alternatives. After all, past performance comparisons between investment companies and their open-ended counterparts invariably cast the former in a good light whichever sector you focus on. Investors choosing closed-ended funds for their mainstream equity exposure are tapping into vehicles that have, at least in the past, tended to outperform the equivalent open-ended options.

There are all sorts of reasons for this outperformance – lower costs, though this is less true post RDR than in the past, investment companies’ ability to take on gearing, and structural advantages are all significant factors. And given investment companies’ track record, why wouldn’t investors focus on them more broadly, whether investing direct or through an adviser?

Traditionally, of course, investors have often been warned that an investment company represents a more complicated and potentially riskier route into collective funds. In truth, this has never been a convincing argument – and the fact that advisers are now so much more likely to select closed-ended funds suggests they don’t buy it.

Nor should direct investors – particularly since the other argument often cited by advisers for steering clear of the investment company sector, a lack of liquidity, doesn’t apply to them, since they’re not making very large purchases on behalf of groups of clients.