Jeff Salway: Post-RDR world can only benefit growth of investment trusts

INVESTMENT trusts have long come a distant second to unit trusts in the sales charts, handicapped by the absence of commission for advisers recommending them.

Investment trust assets have risen by just 2 billion to 80bn over the past decade, a period in which the level of funds managed by unit trusts and open-ended investment companies has grown 90 per cent to 481bn. Yet when it comes to performance, investment trusts have a record that more than stacks up against their more popular counterparts.

A new research note from Alan Brierley at stockbroker Collins Stewart shows that over the past decade investment trusts have bettered their rivals in almost all of the mainstream geographical sectors. Investment trusts have outperformed their benchmarks in six out of eight regional categories, including global growth, emerging markets, UK growth, North America and Europe. Unit trusts have outperformed their benchmark in just two – UK income and global growth. On a head-to-head basis, investment trusts again delivered superior returns in all but two of the eight sectors – Japan and Far East, excluding Japan.

However, there also remains a perception of investment trusts as old-fashioned and fusty. Brierley's research was in response to comments from Peter Hargreaves, chief executive of Hargreaves Lansdown, a UK investment firm, who wrote off the investment trust industry as not "capable of being revived" and "run by a lot of fuddy-duddies who have no place in the industry".

Hargreaves' plain speaking is often refreshing in an industry overpopulated by media-trained drones spouting jargon.

On this occasion, however, he was wide of the mark. His timing was unfortunate, coming as it was revealed that the UK's best-known fund manager, Fidelity's Anthony Bolton, had opted to structure his new Fidelity China Special Situations vehicle as an investment trust. And Hargreaves strangely seems to have forgotten about one particular development that promises to give investment trusts a significant shot in the arm over the coming years.

The Retail Distribution Review (RDR) – changing the way in which financial advice is paid for and provided and coming into force in 2013 – proposes to ban investment advisers from being paid commission by product providers, in an effort to improve transparency and ensure advice is genuinely whole-of-market. The commission paid to advisers has made a significant contribution to the growth of unit trusts compared with investment trusts, which do not pay commission.

Take away commission incentives and there's every reason to expect investment trusts to enjoy renewed popularity with advisers. Why? Lower charges and superior performance, to cite two factors that should be key selling points.

Brierley said: "We look forward to a post-RDR world, when the playing field will finally be levelled, laying the foundations for genuinely independent advice across all fund types."

Then there's the fact that increased post-RDR demand for investment trusts will give the powerful fund supermarkets that do not currently offer them little choice but to review their stance. Cofunds has already confirmed that it will add investment trusts and exchange traded funds (also commission-free) to its investment platform in two years' time, with others likely to follow suit.

Of course, investment trusts have their own drawbacks. Many investors and some advisers consider them excessively complex, with the use of discounts (whereby shares can be traded at a discount or premium to trust value) adding to the uncertainty. And many people remember all too well the split caps debacle of the early Noughties, when investors lost millions after dozens of trusts collapsed when high levels of borrowing and cross holdings came home to roost as market values fell. Split caps are now making a come back, offering solid yields for investors starved of income elsewhere. Their resurgence could be viewed as emblematic as investment trusts claw back ground lost in the advisory arena.

Sales of investment trusts will be dwarfed by those of open-ended funds as Isa inflows reach their annual peak over the next two months and that is unlikely to change in the next three or four years, with significantly more research and analysis of unit trusts. But the gap will close over the longer term if the industry can demonstrate why advisers and investors cannot afford to gloss over the case for trusts.