Investment trusts have a lot to look forward to over the coming months
The prospect of autumn’s arrival signals ‘back to business’ for many in the investment industry (as well as those who regulate us) after the traditionally quieter summer months. For investment companies, in particular, there is a lot coming up over the next few months, with a number of potential positives that may just banish the winter blues.
Hidden secret
Frustratingly, investment companies have frequently been tagged “the City’s hidden secret” over the years. It is true the sector is much smaller than the open-ended (OEIC and Unit Trust) funds sector and most financial advisers tend to steer their clients towards the latter. This is in spite of the fact that the very first collective investment scheme in the world was closed-ended rather than open-ended – Foreign & Colonial Investment Trust, launched back in 1868. In contrast, it was 1931 before the first unit trust appeared, managed by M&G.
Investment companies have remained in the shadow of open-ended funds for many decades, even though they have often delivered better long-term performance (and a lower fee structure). One of the key reasons for this is commission, or lack of it. Investment companies do not typically offer upfront and trail commission for business introduced by advisers. Instead, investors requiring advice on investment companies have had to pay a fee for this. Perhaps inevitably, there is a select group of intermediaries specialising in investment companies, with most preferring to overlook them in favour of their open-ended cousins.
Regulation
Regulation, in the form of the Retail Distribution Review, may signal a higher profile future for investment companies. RDR plans signal the replacement of commission by a fee-based approach that would cover a wide range of retail products. Implementation is not until the beginning of 2013 and the proposals are not yet confirmed, so nothing is certain. However, the likelihood is that financial advisers specialising in investments and wanting to remain independent will need to consider funds other than open-ended funds. This opens the door to a plethora of investments such as exchange traded funds, National Savings and, of course, investment companies.
We are not naïve enough to see this as a panacea for the future prospects of the industry, since the closed-ended structure of investment companies will not suit all. However, we do think that moving towards a ‘fee for advice’ system will add value for consumers and may even encourage the creation of more consumer needs-focused products in the future. It will certainly raise the industry’s profile, since some platforms that currently exclude investment companies have already flagged that this situation will change before RDR is implemented.
IFA links
The AIC is keen to enhance its links with the IFA community and to provide educational support to advisers who have not previously considered investment companies, for whatever reason. We have begun talking to a number of our member companies, as well as other investment bodies and trade associations, in order to devise a training programme that can deliver a cohesive solution both before and after RDR arrives. Some advisers may be daunted by investment companies because of their closed-ended structure, the prospect of explaining discounts and premiums and, of course, the impact of gearing on their clients’ investments.
However, our training will help remove the mystery of the closed-ended universe and also explain how investment companies can be particularly useful for certain types of investments and how they can add value to client portfolios.
RDR is one reason for us to be cautiously cheerful as we reach the end of summer. Another is the modernisation of tax rules for investment companies. This has the potential to deliver new investment flexibility for managers of closed-ended funds as well as lower administrative costs.
Investment companies already often have lower charges than open-ended funds so any downward trend is welcome. Fund costs are often more visible (and more talked about) when returns are modest or even negative. However, whether we are in bull or bear territory, lower charges can only be good news.
We take a great deal of encouragement for the future from what we have already witnessed so far this year. New launch activity has resulted in new assets of £1.16bn, spread across 10 new investment companies. While this is not a record-breaking year by any means, it is very positive since the amount raised is already double 2009’s figure for the whole year. Subject to a benign economic backdrop, there is no reason why this trend cannot continue.
Big hitters
Interestingly, some of the industry’s biggest ‘hitters’ have been launching funds this year. Anthony Bolton chose a closed-ended structure for Fidelity China Special Situations; this was the biggest investment company launch in more than a decade and a significant boost for the industry as a whole, since it drew attention to the benefits of closed-ended structures.
Aberdeen Asset Managers has recently launched its Latin American Income offering while J.P. Morgan has launched not one but two companies in a matter of months, Global Emerging Markets Income and J.P. Morgan Brazil. The diversity of the companies being launched is quite notable, with a real focus on emerging markets and other specialist sectors. The nature of these launches rather puts paid to the ‘dinosaur’ tag that the investment companies sector has attracted from time to time over the years.
We are cautiously optimistic that the industry has a number of reasons to look forward with optimism. Modernisation of taxation rules will remain low profile to most but stands to benefit the industry as a whole.
At the other end of the scale, the implementation of RDR will be both a challenge and an opportunity but one that we will grasp with conviction on behalf of our member companies. We look forward to working with advisers to ensure that RDR is delivered successfully and that it creates a revitalised and thriving advisory market for the future.
Ian Overgage acting communications director at the AIC
