Daniel Godfrey, The AITC’s view
Investment companies have survived numerous crises in their 150-year history, perhaps none more challenging than the recent collapses in the split-capital sector. That is now behind us and the industry can start to focus on what is needed to thrive rather than just to survive.In some ways, the split-cap crisis has led to learning and change that has strengthened the sector. The changes to the listing rules following CP164 resulted in new requirements while the Treasury consultation on the future of investment company regulation has also led to certainty for the time being that the structure of our regulatory regime is to be kept intact. The net effect of all the changes, in the improved practice of managers and in the better understanding of brokers, is an industry that is far more receptive to change and less tolerant of persistent mediocrity. This is exactly what is needed as the background against which investment companies can come into their own. Investment companies are held in the personal portfolios of many sophisticated IFAs who would never consider recommending them to their clients. Part of the reason is the lack of front-end and trail commission. However, spend six months with the broker division of a big management group and you will understand what level of resource and professionalism is brought to bear on promoting its open-ended funds to the IFA and private-client broker market. Both in email and printed form and face to face, the level of support is on a different level from that generally evident in closed-ended funds. There are some very good reasons why this should be the case. For the managers, every sale of an open-ended fund brings new management fee revenue straight to the bottom line. For a closed-ended fund, at best, it represents a reduced likelihood of losing the management contract. It could also be said that fund managers do not get paid enough to commit such resource to the promotion of their closed-end investment company clients. In some ways, some investment companies are retail funds available at a wholesale price. No wonder they are so popular with the most sophisticated private investors. With regard to the commission disincentive, the market is gradually moving in our direction. The advent of true wrap products will enable advisers to make the same money selling open-ended funds, gilts or a closed-end investment company share. It may be possible to help accelerate this progress and the AITC is working with a collection of interested managers to try to do this. Share buybacks, discount control mechanisms, annual reporting on the continued appointment of the manager the development of the AITC corporate governance code, which ensures that boards ask all the key questions of themselves and their managers, have all helped the industry to raise its game. Finding a real mechanism for marketing to quality financial advisers remains one key area where the industry needs to improve if it is to move on to the next stage of its development.