During the near quarter century I have been sharing my views on investment issues with the readers of Money Marketing, I have often touched upon the world of investment trusts. Until comparatively recently, all but a very few IFAs considered them to be outside their remit. This was a cause of great frustration for the trade body that represents these companies – the Association of Investment Companies – which feared that the absence of a commission incentive meant they were ignored in favour of open-ended investment products.
Arguably the RDR levelled the playing field and the way in which discounts have narrowed over the past two years does appear to give credibility to such a contention. I wonder, though, whether this has been quite as virtuous a development as supporters of closed-ended investment vehicles might consider. After all, with narrower discounts, one of the telling advantages over open-ended funds is reduced.
Investment trusts are the cradle of professional investment management. The first trusts were launched some 150 years ago – fully 60 years before the first unit trusts came on the scene. But the growing popularity of the open-ended variety saw them overtake investment trusts in value swiftly as interest in equity investment blossomed during a period of privatisations and demutualisations. Despite a clear revival in the fortunes of their closed-ended cousins, they remain a significantly larger sector.
Some years ago, the AIC launched an initiative aimed at educating IFAs in the advantages this sector could offer to their clients. I recall a weary AIC official remarking that it was an uphill struggle and that discretionary wealth managers (then termed private client investment managers or stockbrokers) carried far more clout in this field than IFAs. Indeed, he suggested the investment management firm for which I then worked (admittedly one of the largest then) probably owned more investment trusts than the entire IFA community.
Of course, back then, buying the shares of an investment trust could only be accomplished through the stockmarket. Today, platforms are playing an increasingly important role in allowing IFAs to include them in the mix of investment products they place in their clients’ portfolios. If the RDR has accomplished anything, it has made it easier to consider and then acquire the closed-ended alternatives, but I doubt it is the only – or even the most important – reason for their growing popularity.
Big discounts make it virtually impossible for new trusts to be launched. The cost of floating an investment company on the stock market ensures the shares at the issue price effectively stand at a premium to underlying assets. Some trusts do regularly stand at a premium, particularly if they are invested in an asset class which is difficult to access elsewhere. But paying a premium to invest in assets that are freely available through a variety of avenues makes little sense to me.
As it happens, some nine new investment companies were launched in the year to the end of last June. Five of these were in so-called specialist sectors, while a further two invested in property. The narrowing of the average discount has made it easier to issue shares in new trusts, but it is still difficult to get a conventional, listed equity trust off the ground. And if discounts are small (presently they are a little over 3 per cent), then wise investors need to look at other options.
Make no mistake, I remain a big fan of the sector. New approaches by managers, such as launching savings schemes and employing discount management systems, have probably paid a more important role in bringing the average discount down.
But when that discount has all but disappeared, these shares could be vulnerable in the next market upset. IFAs need to use these vehicles wisely as part of a wider armoury and pay heed to discount levels.
Brian Tora is an associate with investment managers JM Finn & Co