IT HAS been hailed within the fund management industry as a revolution and a brave new dawn for investment trusts, one of Scotland’s greatest contributions to finance.
But Andrew Bell, who has just taken over as chairman of the Association of Investment Companies, the trade body for the 343-member investment trust sector, is not letting expectations about the new world of the Retail Distribution Review (RDR) run away with him.
“It will be a slow burn”, he told me last week. “It’s not like a cure for baldness that people have suddenly discovered. The positive for the investment trust sector is a levelling of the playing field. You no longer have a strong disadvantage against products offering commission. Advisers can make a clear recommendation on the basis of the merits of the underlying investment.”
For the broad mass of private investors, RDR’s arrival will have passed with little notice. The switch to fee-based advice, the end of commission-driven product sales, a better prospect for those products that have traditionally not paid commission: these seem arcane and esoteric concerns for a private investor whose main preoccupation remains whether they should be invested in the stock market at all, and, if so, in which of the bewildering multitude of funds and trusts on offer.
It should certainly be a revolution for investment trusts which, while similar in objective to unit trusts differ in fundamental respects. They are quoted companies in their own right, listed on the stock exchange. They are able to borrow, should they choose. They can hold shares in unlisted companies. And they can invest directly in property. Oh, and they do not, and never have, paid commission to independent financial advisers to encourage clients to invest in them.
Bell has been a director of the AIC since 2006, and a deputy chairman since 2011. He is also chief executive of Witan Investment Trust and a non-executive director of Henderson High Income Trust plc.
He is under no illusions about the work that investment trusts have to do if RDR is to bring the benefits attributed to it for investment trusts.
“Things the public don’t know about are gearing and discounts and here the sector has to explain itself. The investment trust annual report needs to be a document that people can read and understand. If the sector is to take advantage of the more even playing field, it needs to explain itself and what it is about.”
Investment trusts have, broadly speaking, been able to enjoy a lower management cost advantage over unit trusts. But it would be unwise to assume this competitive margin would continue. “The removal of trail [commission paid to independent financial advisers] is set to lead to downward pressure on unit trust management fees. And on a five-year view it is more likely to put pressure on management fees across the industry. It will be a slow burn.”
That could be a fitting description of the popularity of investment trusts over the years. But the sector recently passed a historic milestone, breaking the £100 billion barrier for the first time. Total assets under management hit £100.8bn at the end of January.
While there has been great change in this 145-year-old sector, what is arguably most striking is its continuity and the survival of major names over the decades – Dundee-based Alliance Trust, Edinburgh-based Baillie Gifford (Scottish Mortgage Trust) the stable of Murray trusts (now with Aberdeen Asset Management), Edinburgh Investment Trust and Andrew Bell’s own Witan.
But change there has certainly been with the rise of specialist sectors. Bell says: “There will be polarisation between funds that appeal as a cornerstone of a portfolio, and specialist trusts that unit trusts cannot offer, such as investment in property or venture capital vehicles that are by their nature less liquid.”
How does he view the market now? It has experienced a spasm of what he calls “New Year-itis”.
“The second half of last year was a fearful period when Europe and the US battled with problems. But the reasons for being frightened to bits are less strong than a year ago. A lot of things we feared would happen in the eurozone did not happen.
“In addition, asset allocators seem to have decided that government bond yields are rubbish value and equity yields were offering a positive return. Equities are not in bargain basement territory but they look attractive compared to other asset classes.”
Recent smoke signals from the Financial Services Authority suggest it is having second thoughts on its earlier proposals to discourage the sale of venture capital trusts to retail investors (“a case of overkill rather than investor protection,” says Bell).
Two issues are of particular concern to him: “One is the travail of regulatory change and how does the sector deliver returns to people where safer areas of investment such as deposit accounts and fixed interest have been effectively cut off due to the collapse in interest rates. How can we appeal to people who need well managed and diversified returns but who have not before considered an investment trust?
“The second is a broader issue across the financial sector generally: how to rebuild and uphold trust.” This is a formidable challenge in the wake of the financial crisis.
Central to both is financial education, of which he is a strong advocate, and encouragement to investors to take a longer-term view and not to be so fixated on short-term fluctuations. “If you focus on underlying things you become less neurotic about day-to-day movements.”