Paul Farrow: Investment trusts must not bank on RDR to boost their profile
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The investment trust industry has long struggled to raise its profile and it has few colourful figureheads to promote its wares.
Which is why it must be a little disappointing for the Association of Investment Companies and its members to learn that one of the sector’s best-known characters, Katherine Garrett-Cox, has rejected any hope that RDR might boost the popularity of closed-ended funds.
Speaking at an Association of Investment Companies roundtable earlier this month, the chief executive of Alliance Trust, one of Britain’s largest, was reported to say: “The reality is this (RDR) is not going to be a panacea for the industry, in my humble opinion.”
There is no doubt that investment trusts have received their fair share of criticism over the years.
One is that they belong to a bygone age - although some old warhorses, it would seem, have proved to their many critics that there is life in them yet.
Looking at research by Canaccord Genuity, investment trusts that have a track record dating back more than a century continue to generate acceptable returns, despite experiencing choppy waters lately.
Trusts such as Foreign&Colonial (founded in 1868) and Alliance (1888) have both outperformed the MSCI World index over the past 10 years.
But it is not these old timers that whet the appetite. Many big trusts have delivered annualised returns 7, 8 or 9 percent better than the benchmark; they include emerging market trusts, commodity trusts and infrastructure trusts.
According to new research on the 25 largest investment companies, 22 have outperformed relevant benchmarks over the past 10 years, typically by a significant margin _ 3.3 percentage points. All 16 equity-focused investment companies in the report have outperformed the equivalent unit trust sector average over the past 10 years by a simple annualised average of 4.3 percentage points.
Alan Brierley, the author of the report, has frequently been scathing in the past, both about independent financial advisers who continue to ignore investment trusts and about critics who have lambasted them as the “walking dead”.
“We wonder what happens if the sector ever wakes up,” said Brierley, who obviously has a vested interest in banging the investment trust drum.
In the past, advisers have said that they do not recommend investment trusts as they are complex and can be risky because of gearing (borrowing money to buy shares).
Brierley has suggested that commission payments have “fuelled a blinkered approach by many so-called independent advisers”, and that this has been a key driver of the long-term growth of the open-ended fund industry.
His wrath is not directed simply at IFAs. He said management companies had failed to show the same enthusiasm for marketing the effectively captive, lower-margin investment trusts as they had for their open-ended funds or unit trusts.
He has a point.
Attempts to attract investors in the past have fallen on deaf ears. The ill-fated “its” campaign, with Italian crooner Paolo Conte, failed to wake television audiences in 2000, while the split-capital investment trust scandal a couple of years later scared off legions of investors for years.
Many were expecting this to change once RDR ends commission. It is perhaps ironic that not getting paid an incentive should be the motivation to recommend investment trusts. But, if the stance taken by one of the UK’s most popular investment trusts is anything to go by, the status quo will remain.
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Paul Farrow is personal finance editor at the Telegraph Media Group
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