While the investment trust sector looks likely to continue to shrink for the short term at least, those trusts remaining should be well positioned for recovery
Investment trusts, in common with other retail investment products, are suffering from a lack of confidence in the markets. If property prices fall next year, we could really see people stuffing their money under the mattress.
The performance of the markets is not something about which the AITC can do anything and nor, individually, can investment managers. But aside from the markets, there is a great deal the investment trust industry can do, both to restore confidence, as far as is possible in the circumstances, and to put ourselves in a good position to make the best possible use of the upswing when it comes.
It is this confidence building and product strengthening that has been occupying our thoughts for much of the past year.
The industry worked closely with the FSA to agree changes to the listing rules, which have increased transparency and tightened independence.
The AITC has produced a corporate governance code specifically for investment trusts to provide boards with a blueprint for the issues and activities they should be considering as part of the exercise of their responsibilities to shareholders.
We have produced a guide to board evaluation that is designed to help boards meet the requirement of the combined code that they conduct self appraisal, both of their performance as a board and as individual directors, on an annual basis. We have also produced a number of other guides for boards covering issues ranging from getting the most from a corporate broker to evaluating the performance of the fund manager.
Liquidity is a serious issue for investment trusts so we have also been thinking about the distribution chain and how it can be improved. That is why we are closely examining the possibility of establishing a generic wrap product that would allow consumers to buy and hold shares in any investment trust and keep them on a single platform, whether it be for Isas, Pep consolidation or Sipps, lump sum or regular contribution.
We have long been great supporters of the Transact wrap product, which allows advisers to use open-ended funds, investment trusts, gilts and UK-listed equities in a way that levels the commission playing field.
We are also great supporters of quality independent advice and constantly encourage the Government and FSA to adopt a twin-track approach of encouraging consumers to seek quality independent advice while unbundling the cost of advice from the cost of the product.
We are relaxed about the retention of commission as a mechanism for advisers to earn a living in respect of their labours and do not see unbundling as being part of a death knell for this form of adviser remuneration.
With the work the industry has in hand, I believe we are well placed for the next upswing, although this may run contrary to many people's views about the prospects for investment trusts. Although there is no doubt the industry faces significant issues it must overcome, they are by no means insurmountable and may prove to be lighter than the challenges currently facing the rest of the financial services industry.
In an environment where market returns are likely to be far lower than those we got used to in the last quarter of the 20th century, low total expenses are going to be attractive. Investment trusts will not have to re-engineer their businesses and distribution methods to adapt. Many others will.
Investment trusts continue to benefit from:
• Low total expenses
• High transparency
• Independent boards to represent interests of shareholders.
• The ability to take the long view, thanks to the closed-end structure.
• The ability to gear.
• Annual investor meetings.
Investment trusts recognise the issues with which they are grappling and, across the board are moving to resolve them. This is where we expect to build an edge.
While there is little doubt the investment trust industry will continue to shrink slowly in the short term, what will be left will be ideally positioned for strong growth as the markets recover.
Daniel Godfrey, director general, AITC