Investment fashions change slowly but once on the turn they can develop with incredible force. Nowhere is this more true than in attitudes to investment trusts. While long popular with many retail investors, they were shunned for decades by banks, investment salesmen and professional advisers.
All this has now changed dramatically. Figures released last week showed that 2015 was a record year for adviser and wealth manager purchases of investment companies via platforms.
Adviser purchases totalled £686.9 million in 2015, up 43 per cent on the previous year (£479.5m) and some 72 per cent higher than in 2013 (£399.8m). Adviser purchases of investment companies in 2015 were nearly triple the 2012 pre-Retail Distribution Review (RDR) level (£236.6m).
Research by the Association of Investment Companies (AIC) using Matrix Financial Clarity shows that while purchases last year were bolstered by the launch of Woodford Patient Capital, it would nevertheless have been a strong year without it. Even omitting the second quarter altogether, purchases for the other three quarters of 2015 were still up 17 per cent on the same three quarters of 2014, from £354m to £415m.
Ian Sayers, AIC chief executive, pictured, said: “It’s encouraging that adviser purchases of investment companies in 2015 are at record levels and have nearly tripled since before RDR. It’s significant that the number of adviser firms using investment companies hit an all-time high.”
The merits of investment trusts will be well known to readers of this column. For more than ten years I have been highlighting the attractions of trusts over unit trusts and open-ended investment companies.
I ran into resistance from a number of IFAs. Either they found them “too complicated”, or, I suspect, in the world before the RDR there was a heavy commission-driven sales bias in favour of much better known and higher profile unit trusts.
All that has changed. The reward system for IFAs is now much more neutral as between unit and investment trusts. Education and training programmes have been introduced to help educate IFAs on how trusts function. The AIC has trained more than 4,000 advisers and this year it is running more adviser events than ever.
And investment trust companies have become more professional in enhancing the appeal of trusts to a wider public.
Those biases against trusts which persisted in the professional advisory community have now largely gone. And I was particularly pleased when two years ago the sponsors of our IFA of the Year competition allowed investment trusts to be included as an asset class.
Unit trusts are easy to understand, and easy to buy and sell, whether by lump sum investment or by regular monthly purchases of shares. Alongside the broad-based generalist trusts there is a wide choice of trust specialisms, both by sector and by geography.
Information and disclosure of trust investments and performance is notably higher than that for unit trusts. With a full and detailed annual report, investors are able to better informed about the underlying investments in the trust and the buying and selling activity of the managers.
Investment trusts, by being “closed-end” mean that managers are not forced to liquidate holdings to meet redemptions by investors. And then there is the discount – the ability for investors to buy investment trusts standing at a discount to the net asset value of the underlying investments in the portfolio.
Debate about investment trust discounts has raged for years. Many investors enjoy being able through an investment trust to buy into a wide-ranging portfolio of shares notably cheaper than it would cost them to buy and build such a portfolio on their own.
But discounts – particularly for those trusts whose specialism has fallen out of favour - can act as a value trap. Many trusts now have mechanisms to control discounts which can widen when overall investor demand for equity investment is low or when investment performance is not accurately reflected in the standing of the trust’s shares.
The most popular sectors in 2015 mainly reflected the continued strong demand for income. They were: Global (16 per cent), UK Equity Income (12 per cent), UK All Companies (10 per cent), Property Direct – UK (9 per cent) and Infrastructure (6 per cent).
The UK equity income sector is trading on around a four per cent dividend yield, offering a “relatively attractive” return compared with bank deposit rates.