Missing a trick

Is the consolidation of wealth management groups leading to clients missing out on opportunities?

Are the largest financial advisers and wealth managers missing a trick in the investment companies sector? According to a fascinating report in this week’s Portfolio Adviser, consolidation in the intermediary market has led to some wealth managers, now much larger in size, worrying about the liquidity that smaller investment companies offer. Where once these managers would have been perfectly happy placing client cash in funds with a market capitalisation as low as £100m, their minimums today are apparently more like £500m.

The shift appears to be relatively subtle: it’s not as if wealth managers are now disappearing from the shareholder registers of smaller funds. Nevertheless, it does now seem to be the case that some managers take a much more conservative view about the funds that may pose them liquidity headaches.

This isn’t entirely unexpected. Clearly, as wealth managers grow in size and assets under management increase, liquidity becomes a more pressing concern. Managers running generic strategies on behalf of large groups of clients need to be confident in their ability to trade in and out of funds they might choose for these investors.

Nor is this trend without advantages. As Portfolio Adviser reports, Nick Greenwood, the manager of fund of funds Miton Global Opportunities, has been talking up a window of opportunity to buy strong, well run investment companies at cheaper prices as wealth managers move away from them.

It’s also the case that the growing appetite of retail investors for closed-ended funds provides a new shareholder base for many of the investment companies now less likely to appeal to the wealth manager community. Also, adviser purchases of investment companies are up overall, and many intermediaries are not constrained by the liquidity concerns of their largest peers.

Nevertheless, the exclusion of a large number of otherwise attractive investment companies from wealth managers’ universes of potential investment opportunities simply on the grounds of size is regrettable.

Not least, these managers’ clients are missing out on funds that could bring something extra to their portfolios. That extra might be the performance advantage that investment companies have time and again been shown to deliver relative to their open-ended counterparts.

Or it might be the exposure to a broader range of assets that investment companies offer; from private equity to infrastructure and from debt to forestry, the closed-ended industry has led the way in providing a means for a broad investor base to access asset classes once reserved for institutional investors. Very often, these asset classes provide significant diversification and performance benefits.

From investment companies’ perspective, the retreat of wealth managers from many funds in the sector is also unfortunate. It contributes to the perception that investment companies are somehow exotic and unusual – to be used only in unconventional circumstances or for niche purposes. Nothing could be further from the truth.

The bigger losers, however, are wealth managers’ clients, particularly since the influx of retail advisers at many investment companies is preventing them slipping to heavily discounted valuations as intermediaries move out. Those clients may not even be aware they’re losing potentially attractive opportunities simply because of the size of the firms with which they’re entrusting their money, but that’s what is happening here.