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Are more advisers using investment companies (trusts)?

Latest research from Unbiased shows they are – and why, says Jemma Jackson of the Association of Investment Companies

Whilst it’s still small steps when it comes to increasing adviser familiarity with investment companies, looking back to the first adviser event I attended, some 16 years ago, it’s striking how far things have moved on. It started well enough with my first adviser introduction, until I mentioned the words ‘investment trust’ (as we called them back then). That did it. His hands went up, retreating steps were made, and he left me with two words hanging heavy in the air: “Gearing! Discounts!” Very dramatic, I thought.

We’ve come a long way since then. Adviser use of investment companies in client portfolios has been on the increase since the Retail Distribution Review (RDR), and recent research conducted by the AIC in association with Unbiased makes for heartening reading. Some 43% of advisers say they are now using investment companies in client portfolios, compared to 36% pre-RDR – good progress over a few years.

The motivating factors for advisers when it came to investment companies were the sector’s strong long-term performance (59%), competitive fees and charges (50%) and freedom to invest in a wider range of assets (44%). And what’s more, those discounts hitherto considered a concern by so many advisers are now being perceived as an advantage. The potential to buy assets at a discount was the fourth most commonly cited advantage of the sector, even ahead of investment companies’ income advantages. How’s that for a turn up for the books?

Is gearing still an issue?

But gearing remains a significant stumbling block – perhaps not a retreat-out-of-the-room type deal breaker of yesteryear, but the single largest concern nevertheless amongst 40% of advisers (followed by a lack of industry knowledge). It’s worth noting, mind you, that the average gearing level for the sector is a relatively modest 7%, and half of the sector doesn’t use gearing at all. Not that all investment companies shy away from gearing, either – quite the contrary for some sectors. But it really is a matter of doing your homework and finding the company that best suits your client’s risk profile.

Interestingly, one of the AIC’s best research initiatives of recent years, in my view, was based on the feedback we received from financial advisers. It is all well and good, the feedback went, publishing a gearing level for a member company but how are advisers to gauge how high that gearing, and hence risk, might be in the future? It’s a valid point, and over the last few years the AIC has been publishing gearing ranges (the board’s low to high for the company’s gearing in normal market conditions), as well as historic gearing, so advisers can see how actively gearing has been managed over the last few years.

If it’s good for the goose

Advisers are eating their own cooking, too. Over a third (35%) of advisers are also holding investment companies in their own portfolios, typically holding 10%, but with a more ardent one fifth (18%) having more than 25% of their portfolio in investment companies. Amongst clients, an even greater number of advisers held investment companies within their clients’ portfolios (43%), and 12% had more than 25% investment company exposure. Of course open-ended funds took by far the greater share, with 96% of advisers holding open ended funds in their portfolios, and 98% of advisers using them in client portfolios.

Interestingly, 16% of advisers say that the problems faced by some open-ended property funds this year, with a number suspending dealing, has made them more likely to consider investment companies or REITs as an alternative.

There’s still a long way to go, but the investment company sector is slowly building up interest, and an increasing number of advisers are becoming aware of their merits. Certainly I haven’t managed to clear a room in recent times – progress indeed!



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