View of a golden future ... for some
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Investment trusts will have a “head start” in the supposed level playing field after RDR, says Collins Stewart, but it will be those that meet key criteria that will see a surge in demand.
According to Collins Stewart, the introduction of the retail distribution review (RDR) at the end of this year represents a “golden opportunity” for investment trusts. This is because of the supposed levelling of the playing field, in which IFAs, who have traditionally ignored closed-ended funds as they do not pay commission, will have to consider them as part of a wider suite of investment products from January 1.
To add to their appeal, Collins Stewart claims that over the 10 years to December 31, investment trusts have outperformed their open-ended peers by “a healthy margin” in eight out of nine regional sectors, and their benchmarks in seven. Unit trusts, meanwhile, have underperformed their benchmarks in each of these sectors.
The only region in which Oeics and unit trusts trump their closed-ended cousins is Japan, which is also one of only two sectors (the other is North America) in which investment trusts have underperformed their benchmark over the past decade.
Alan Brierley, the author of the Collins Stewart report, says: “Investment trusts have outperformed open-ended funds over the long term, over most timescales, in almost all key comparable sectors. (Investment trusts continues below)
“However, despite a superior performance record, growth of the underlying sector has lagged behind the open-ended sector. The total value of the Oeic and unit trust sector has increased by 142% from £236 billion to £571 billion over the past 10 years ,while the investment trust sector has enjoyed respectable but more pedestrian growth, increasing by 33%, from £68 billion to £90.3 billion.”
So will RDR be the green light for this growth to even out? According to a poll at the Winterflood Investment Companies conference recently, 36% of delegates expected that RDR would have either a marginal or no impact on the demand for investment trusts.
Simon Elliott, the head of research at Wins, says that as their attendance at the conference alone suggests the audience clearly has some interest in investment trusts, this could be taken as a “worryingly high response”. Only 11% of those polled thought the impact would be “considerable”.
Elliott notes the clear majority of the audience thought the impact of RDR would depend on individual trusts, the consensus opinion being that the “big brands, big trusts” would benefit, while it was unclear how the rest would do.
This is a theme Brierley picks up on. In his report he says the investment trusts that will be well placed to benefit from RDR will be those that “can demonstrate a clear investment philosophy and strategy, a proven track record, a strong market profile, an experienced manager with significant depth of resource, a competitive TER [total expense ratio] and good marketability”.
Brierley highlights several structural advantages, which he says give closed-ended funds a “head start” over their open-ended peers. The first is lower management fees. Last year Collins Stewart reviewed 22 investment trusts with market caps of over £200m where there were directly comparable open-ended funds. It found that the average annual management fee differential rate was 63 basis points (bps), with a range of 0-111 bps.
”Investment trusts have outperformed open-ended funds over the long term, over most timescales, in almost all key comparable sectors”
“This report also found that more than three-quarters of these investment trusts outperformed their open-ended clones over the long term,” Brierley adds.
Other factors in favour of investment trusts, says Brierley, are their management of cashflows, their ability to employ gearing, their flexibility in being able to issue and buy back shares to enhance their net asset value (NAV) and their ability to use revenue reserves to smooth dividend payments.
“In addition, the investment trust sector gives investors exposure to asset classes where underlying liquidity means the open-ended structure is not appropriate, eg listed infrastructure, listed private equity or loan funds,” he says.
Brierley uses the case of BlackRock World Mining and the open-ended BGF World Mining as an example of the headwinds facing investment trusts. Over 10 years to December 31, these funds, both managed by Evy Hambro, have delivered strong returns. The NAV total return of the investment trust rose 587% while the open-ended fund delivered 404% versus its benchmark, which was up 395%.
Brierley says: “Despite this superior performance record, the investment trust has rarely traded closer than 7% discount, with an average 10-year discount of 13%. Meanwhile, during the same period, the open-ended fund has increased from $26.6m (£17m) to $12.4 billion.”
To address this disparity and raise awareness of investment trusts, an education drive from investment trust providers may prove crucial ahead of RDR, if this “golden opportunity” is to be fully grasped.
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