Popularity of investment companies continues to grow

We’ve seen two more compelling pieces of evidence this week of the breakthrough investment companies have made with buyers of collective funds. First, the Association of Investment Companies published data showing that via platforms, advisers and wealth managers made purchases of investment companies worth £687m last year – a 43 per cent increase on the £480m seen in 2014. Second, The Share Centre, the retail stockbroking firm, announced that for the first time it was publishing a preferred list of closed-ended funds for its private investor clients.

In other words, not only is demand for investment companies soaring amongst intermediaries, but private client stockbrokers are convinced there is an appetite for the funds amongst their direct investor customers too. The Share Centre’s Graham Spooner says he now hopes this appetite will grow. “Investment trusts have been around for 150 years, survived two world wars and many financial crashes and yet they remain in the shadows for many investors,” he says.

We know, of course, about one important reason why investment companies are now in favour. But while the retail distribution review of three years ago at a stroke levelled the playing field between open-ended and closed-ended funds by preventing the former from any longer paying commissions to financial advisers recommending them, this regulatory shake-up was only the beginning. For while advisers no longer had any reason to favour open-ended funds over investment companies, they needed positive reasons to embrace the sector.

What many intermediaries have realised since then is that there is no shortage of such reasons. On comparisons of past performance, investment companies consistently do better. On charges, the funds remain competitive, with many cutting their fees in response to the lower costs that the open-ended sector is benefitting from now it no longer has to pay commissions. Then there are structural factors – for example, as Spooner put its “when investors want to pull out, the money comes from the sale of their shares in the market, rather than leading to the potential sale of assets within a unit trust”. The independent nature of the investment company’s board is another plus point.

All of these arguments are just as compelling for private investors – both those who invest direct through brokers such as The Share Centre and the clients of intermediaries. What’s clear now is that a very broad audience is recognising them – including those attracted to the sector due to its ability to pay rising dividends even in difficult periods, thanks to the reserve fund facilities it employs.

What, then, of the traditional objection raised by those who aren’t so keen on investment companies – that they are more complicated than open-ended funds? This argument centres on the fact that shares in investment companies tend to trade at a discount (or sometimes a premium) to the value of the fund’s assets, reflecting how the share price is determined by supply and demand in the market at any given time.

Well, it’s only fair to recognise that some intermediaries and investors continue to fret about discounts – and it’s certainly true that the average discount has widened this year amid widespread investor nervousness about stock market volatility. Equally, however, discounts over the past three years have consistently been low by historical standards – and remain so. This reflects the determination of many investment company boards to tackle the issue proactively through strategies such as share buy-back programmes.

In short, the appeal of the investment sector is finally being recognised by a better informed investor base that no longer has a financial incentive to look elsewhere for collective fund exposure. Now operating on a level playing field, the sector is more than holding its own.