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Comparing open-ended and closed-ended investment vehicles

It is entirely right that investment companies should be looked at alongside open-ended funds for client portfolios, says Ian Sayers, Director General of the Association of Investment Companies (AIC)

As the trade body for the investment company sector it will come as no surprise that for us, the most positive outcome over the 19 months since RDR was implemented, is the fact that investment companies must now be considered alongside other types of fund (unit trusts and OEICs being the most obvious comparison).

Whilst I’m an unashamed flag-flier for the investment company sector, it is entirely right that investment companies should be looked at alongside open ended funds. Many fund managers manage both, after all – so why shouldn’t advisers consider both. The overall aim is the same.

The AIC has been training advisers who are less familiar with the sector about issues which affect the performance of investment companies, such as discounts and the closed ended structure. Advisers have frequently asked how this translates into actual performance and, in particular, how this compares with the performance of unit trusts and OEICs. Many of our adviser-led initiatives in the past few years have come from feedback from advisers themselves, and the AIC’s comparative performance table AIC is no different.

We have been publishing, on a quarterly basis, the performance of investment companies relative to comparable open-ended funds, compiled by the analysts at Canaccord Genuity. We hope publishing a quarterly comparative performance table over time will help advisers understand better how different market conditions can affect the performance of investment companies compared to open-ended funds.

Of course gearing is one of the key contributors to investment companies’ outperformance over the long-term, although it can add volatility over the short-term. But what advisers often forget is that, whilst gearing is a key feature of the investment company sector the average gearing for the sector is actually a relatively modest 7%. Naturally some sectors and companies can be much more highly geared than others, but the information is all easily accessible, not least on the AIC’s own website. The issue, of course, for advisers is where will that gearing be tomorrow – could the company’s risk profile change? And from a due diligence perspective, this is crucial. In response to this type of feedback from advisers, the AIC is now publishing data on where gearing for individual member investment companies has been in the past, where it is currently, and how high it might go in the future in normal market conditions (the discount range).

Many advisers will be getting increasingly acquainted with the key differences between investment companies and open ended funds. But one of the most overlooked advantages of investment companies is the role that independent boards of directors of investment companies play – and the value they can add for shareholders. In a recent monthly note, analysts at Winterflood Securities commented that “the role of independent boards in initiating corporate activity cannot be underestimated. In our opinion, the level of corporate governance across the sector has improved significantly over the last ten years. Boards are more alive to their wider responsibilities, particularly to the interests of retail shareholders.”

Of course corporate activity in the sector is another article for another time. But it can be tremendously reassuring that there is an independent board of directors, adding an additional layer of scrutiny and oversight in the investment company sector – whatever the market conditions. For advisers looking to learn more about investment companies, we’d be delighted to hear from you and the adviser section of our website is a good place to start.

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