The investor sentiment pendulum has moved too far towards risk-averse since the financial crash. The public, chastened by austerity and political volatility from Brexit to North Korea, is as interested in capital retention as capital growth. It is a familiar refrain in the City of London, Edinburgh and other financial centres since banks went belly-up or were bailed out by the taxpayer in the crisis that first unfolded with queues around Northern Rock ten years ago last week. But it is still surprising to hear the sentiment also voiced by Ian Sayers, chief executive of the Association of Investment Companies (AIC), the trade body of the venerable investment trust industry – a sector that will notch up its 150th anniversary next March. “At a time when you need to be squeezing every last bit of performance out of your asset portfolio, everyone seems to be talking people down the risk curve. Maybe we should be tilting it up,” he said.
Given the AIC’s sometimes perceived fusty investment trust provenance, at first blush it is as if a staid relative has urged you to jack in your job and take a year’s unpaid break in the Amazon rainforest. But Sayers, who entered the investment industry in the late 1990s and has been head of the AIC since January 2010, makes an articulate case. He said caution is understandable given the trials society has been through, but that it might not be what a younger person needs looking at a 40-year pension accumulation timeframe. He said that before the crash many investors were too aggressive in their investment strategies, citing the buy-to-let boom etc.
“But there’s a concern now it [sentiment] has swung too far the opposite way. If you are coming up to your sixties, some of these conservative pension schemes are fine,” Sayers said. “But is it right to have 50 per cent in bonds [seen as safer but low yielding investments] for a person in their twenties? It’s too cautious and potentially as damaging [in terms of returns over the whole period]. And you won’t find out until 40 years in the future.”
The AIC boss stressed he was not urging people to put vast amounts of their pension pots into private equity, for instance, even though the sector’s performance was “fantastic” over a long period, but that a P/E exposure of sometimes “less than 1 per cent” seemed unconscionably low.
His view is clearly not linked to a need to drum up business for the closed-ended investment companies that are his membership, which also includes venture capital trusts (VCTs) and offshore investment companies. Investment company activity in the first half of 2017 showed a sector with the wind at its heels. Industry assets hit a record high of just under £168 billion at the end of May. The six months to the end of June saw ten flotations, raising £1.5bn, compared with just one new stock market launch in the same period last year. Secondary issuance by AIC members reached £3.3bn, a record level over a half-year period and compared with £1.8bn in the first six months of 2016. Sayers said it is also interesting to note that much of the new money-raising, both new and secondary, favoured high-yielding, alternative asset classes such as debt, property and infrastructure. “When you look at the world we live in, you would have been forgiven for being cautious about how the year was going to be, particularly as last year was a bit slower. That could have been the beginning of a tail-off. But instead there have been new asset highs every month, fundraising has really picked up and the demand for income has not gone away,” he said.
Britain’s new lower-for-longer deposit rate template – historically low at 0.25 per cent – has helped this search for income by savers. He added: “Before the banking crisis people could walk down to the Nationwide or whatever and get 6 per cent on their savings, with a full ombudsman’s guarantee and zero risk to your money. There comes a stage where you decide to take some risk.”
The well-aired pension reforms, including the possibility to cash in pension pots and not automatically buy annuities, had also helped the AIC’s members, Sayers said. He cited his father, in his eighties, who had sold his business and preferred to find a pool of share investments to guarantee an income. The UK equity income sector has increased dividends by 2 per cent over inflation over the past 20 years despite hiccups at major dividend payers like the big UK banks and oil giants like BP.
Moving sidewards to politics, he said the AIC had no position on issues like the Scottish independence referendum or perceived diminishing prospects for an early second indyref after the disappointing general election results for the SNP administration this year. But he admitted some professional relief, given that his organisation has 40 members in Scotland.
Sayers added: “The reality would have been for our sector that if they [an independent Holyrood] wanted to retain a Scottish asset management industry it would have needed to retain benign regulation. We would have had to do a lot of work for our 40 members. In that sense, I am probably quite relieved. But as to the [independence] decision itself, I have no view.”
Although closed-end investment companies are probably now more on the front foot than for some years, Sayers is under no illusion that it will take a decent period of time before the “structural bias” against the sector, particularly with independent financial advisers (IFAs), is overcome. He said while wealth managers down the years had advised people to buy investment trusts “in droves”, the IFAs did not do so, largely because they were driven by commissions earned from open-ended funds.
One of the last acts of the old financial regulator, the Financial Services Authority (FSA), in 2013 was to ban the payment of commissions to financial advisors and sales staff by firms whose pensions and investment products they were selling – part of reforms ushered in by the FSA’s Retail Distribution Review (RDR). Sayers said the RDR was a “ground-breaking but not pivotal” levelling of the playing field between investment companies and open-ended funds. The AIC’s closed-ended investment trusts have a limited number of shares on offer to which investors can subscribe; an open-ended fund is typically a unit trust or an open-ended investment company where units are created in response to investor demand.
Since RDR, work referred by IFAs to closed-ended funds has jumped to £900m from £200m. Good as far as it goes, the AIC boss believes. “But that is still only 1 per cent of the £100bn going to open-ended funds. Our share has gone up sharply, but there’s still a long way to go to get it up where it needs to be when considering [investment companies’]long-term performance and income advantages,” he added.
Sayers made the point forcibly earlier this summer in his response to the asset management study final report of the Financial Conduct Authority, the successor to the FSA. Sayers claimed the report was flawed and a “missed opportunity” in that it had seen competition “almost exclusively in terms of how open-ended funds compete with one another. It overlooked the potential for other funds, such as investment companies, to enhance competition.”
Competition in efficient financial markets is an understandable hobbyhorse. He points out that following the big wobble in financial markets after the Brexit vote most open-ended funds had to respond with actions including repricing and even suspending redemptions. By contrast, although investment companies saw their share prices fall in that volatile period, they have largely recovered since and “at least investors were still able to trade throughout this period if they chose to, instead of having to wait months to sell”.
Pressing the sector’s case, the AIC also plans to respond to the Treasury’s consultation paper on so-called “patient capital” – long term investment in companies where quick returns are not expected in favour of wider social gains – before the deadline this Friday. “We will say we can mobilise retail sales as well as institutional,” Sayers said.
And Brexit generally? He said the AIC was “relaxed without being complacent” compared to other sectors which, unlike closed-ended funds, had to worry about passporting rights in the single market after Britain’s exit.