Best sellers

Investment companies have often been described as the collective fund sector’s best-kept secret. But this cliché is rapidly going out of date: it may have been the case in the past that both financial advisers and retail investors were sketchy about what the closed-ended fund sector has to offer, but this is becoming less true with every passing day.

Over the past two years, we have repeatedly seen platforms used by advisers posting record sales of investment companies. Now more consumer-oriented platforms are reporting similar trends.

Take stockbroker AJ Bell, which has just published details of where its self-directed investors chose to allocate their individual savings account (ISA) allowances during the run-up to the end of the tax year last month. It reports that six of the 10 best-selling collective funds on its site during ISA season were investment companies.

That’s a remarkable result that would have seemed inconceivable even five years ago. For years, intermediaries said they were reluctant to recommend investment companies to their clients because individual investors found the structure of closed-ended funds confusing or considered them too risky. The evidence of intermediary platform sales is that fewer advisers now take this view – quite right too, since AJ Bell’s ISA statistics suggest large numbers of investors are perfectly happy to buy investment companies for themselves, never mind waiting for an adviser to suggest they do so.

Part of the explanation for this turnaround is, of course, regulatory. The abolition of sales commissions five years ago levelled the playing field for closed-ended funds, which previously competed for intermediary attention without being able to incentivise this audience.

However, it’s worth pointing out that this regulatory change has also damaged investment companies in one regard. Since they were never able to pay commissions, closed-ended funds were able to undercut their open-ended rivals on price. Now the latter can’t pay commissions either, this advantage has been much reduced.

In any case, on a level playing field, each side must compete on its own merits, which is what investment companies have been trying hard to do. Their structural advantages, including the option of taking on gearing, the opportunity to build up income reserve funds, the lack of fund inflows and outflows, and their smaller cash positions, all offer potential competitive advantage. The bottom line, however, is the imperative to translate that potential into superior performance, whether for income or capital growth.

The investment companies in AJ Bell’s list of ISA best sellers - Scottish Mortgage, City of London, Scottish Investment Trust, Edinburgh Investment Trust, Finsbury Growth & Income and Witan – have all delivered on that imperative. They offer yields and strong capital performance.

However, AJ Bell’s top-selling investment companies are notable for another reason too. We’re often told that closed-ended funds are ideal for illiquid and unusual asset classes such as property or debt, but less well-suited to mainstream equity investment than open-ended funds. Yet all of the funds mentioned above are generalist investors rather than specialists. Clearly, private investors see a much broader role for closed-ended funds in their portfolios.