Last year’s commercial property funds suspension saga revealed the shortcomings of open-ended funds compared with closed-ended structures when dealing with illiquid asset classes.
Whether the fallout itself or the Brexit vote was mainly responsible, the UK property sector proved popular in the second half of last year, making up 10 per cent of all investment trust purchases for the first time ever in Q3.
However, Association of Investment Companies chief executive Ian Sayers believes there is still too strong an instinct among investors to “put everything” into an open-ended fund.
He says: “The share price can still suffer in a closed-ended fund but looking at what happened in the commercial property sector should give people pause for thought. It worked out in our favour, as the data shows. This could have been down to a bit of bargain hunting but I wonder if it was because it was a more sensible place to go for the savvier investors out there.
“What happened to property has shown there is not just a technical distinction; there is value there for those kind of asset classes.”
Sayers started his career as a junior accountant at EY and was thrown into helping set up the tax regime for venture capital firm 3i. He moved to the AIC as technical director in 1998 under the guidance of former director general Daniel Godfrey. He moved steadily up the ranks over the next few years, taking up his current position at the helm in 2010.
The trade body has 350 members, with £140bn assets combined. Membership fees range from £3,300 to £20,000, which Sayers points out is less than others charge due to its smaller size.
“One of the reasons I have been here for such a long time is that, as an industry, it is very diverse. You get more different kinds of funds, which creates more interest. And since they are companies, you get to meet them.
“Talking to a EU regulator recently, I spoke of how people have an affection for these products and he looked at me as I had gone completely bonkers.”
According to Sayers, Brexit should showcase how closed-ended funds can thrive outside the European Union, since a large part of their growth has traditionally come from tax havens.
“You do not have to be in the EU to be successful as a closed-ended fund, as the growth part of the industry has been outside it for the last 15 years. Technically, there is no reason why the UK shouldn’t carry on like the Channel Islands.”
With this in mind, he admits the AIC is relatively relaxed about the impact of Brexit. In particular, it will not have to deal with passporting issues that many asset managers, and the Investment Association, worry about.
“We are very close with the IA and it has got some important issues it wants to look at. It is coming to terms with the single market issue – which it is clear we are not going to be part of – but there are ways to get around that in terms of delegation.
“From the IA’s perspective, there are more complicated issues to deal with. For example, my membership does less marketing of their products into Europe than major asset managers do with their Ucits ranges.” Indeed, 95 per cent of investment companies’ shares are owned by UK investors.
Sayers attacks the effectiveness of EU policymakers on fund regulations such as Priips, and urges the UK Government to set its own rules once it has exited.
“One of the problems with the European experience is that it has taken a huge amount of time to get where we are today with Priips, for example. It has been delayed for a year and then when we do apply it to our sector it will seem a bit clunky in terms of some of the information. It will not be what we will really want; there will be some things we would prefer to put in which perhaps we won’t. It is difficult to run a set of rules for all but that is not the fault of the EU. It is just a reflection of the reality.”
Meanwhile, on the long-running push to increase adviser take-up of investment trusts, Sayers is adamant the products have a big role to play in portfolios. He believes take-up will rise but recognises the amount of paper- work involved on an adviser’s part could put them off.
The AIC has lobbied EU and UK regulators to get rid of the current burden around prospectuses and replace it with a system more like that for open-ended funds, which have much smaller amounts of documentation.
He highlights the fact the higher costs involved with the current requirements also make it harder to launch an investment trusts than an open-ended fund.
“Launching a new prospectus document is very comprehensive, but the downside is it is very expensive to do so. It takes up to £400,000 to get that document prepared and sent out to investors, which puts a limit on the size of funds you can launch.
“And the reality is that most of the information in the prospectus is probably not read. I don’t know many retail investors who go through 100 pages of incredibly tight fine print.”
In terms of where to expect new launches this year, Sayers believes income and alternative income will dominate, particularly if there is another rate cut.
What’s the best advice you’ve received in your career?
When you are writing, write from the perspective of who is reading.
If I were in charge of the FCA for a day I would…
Launch a study on which fund performance does best in the long term and why.
What keeps you awake at night?
My son’s future.
Any advice for new advisers?
Get to know investment trusts, because they are not as scary as you think.
2010-present Chief executive, AIC
2005-2010 Deputy director, AIC
1998-2005 Technical director, AIC
1997-1998 Tax Manager, Ernst & Young