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Investment companies continue to benefit post RDR

Purchases of investment companies to June 2014 show a 48% increase on the twelve months ended June 2013, reflecting a growing demand from advisers and direct investors, says Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC)

It’s nearly two years since the post RDR world was ushered in. Whilst we never expected investment company purchases to sky rocket, we did expect a steady increase: a steady increase that nevertheless represented the single biggest opportunity the sector has seen, with the abolition of commission and the requirement that advisers consider investment companies alongside their open-ended counterparts.

So where are we today? Whilst it’s early days, that slow burn opportunity looks like it may be gathering momentum. Purchases of investment companies in the twelve months to June 2014 reached £422.9m, a 48% increase on the twelve months ended June 2013, and up 112% on the twelve months ended June 2012. The Global and UK Equity Income sectors were again the most popular for advisers and wealth managers, accounting for 18% and 16% of the total purchases of investment companies in Q2 respectively.

The data also suggests that advisers are starting to make the most of the closed-ended structure to gain access to more illiquid and specialist asset classes, since the next most popular sectors in Q2 were Infrastructure and Property Direct – UK, reflecting the current strong demand for income. The closed-ended structure is particularly well suited to alternative assets such as these, because managers do not have to sell stock to meet redemptions. This is particularly useful in the less liquid sectors since managers can take a long-term view of the market.

Sector assets up 17% on January 2013

Industry assets remain close to an all-time high, with assets for the investment company sector at £117 billion. It’s hard to believe that it was only in January 2013 that the investment company industry’s assets broke the £100 billion barrier for the first time.

Clearly strong markets have boosted assets under management but we have also seen a good deal of issuance activity amongst popular companies issuing new shares to meet demand, and of course, there has been the usual new launches too.

Direct investment growing

And it appears that direct private investors are also increasingly finding their own way to the investment company sector. Certainly, in-house savings schemes run by fund management houses continue to do well. Piers Currie, Head of Brand, Aberdeen Asset Management, recently commented that their manager plans have risen enormously in recent years on the same tide as the direct platforms such as Hargreaves Lansdown, Alliance Trust Savings and other execution-only services. Currie commented that “these combined now can account for 70 per cent of all share buying of investment trusts by value.” Meanwhile, Hargreaves Lansdown recently reported that the number of its customers who have money in an investment trust has doubled in the past five years.

Equity income performance a key driver

And, given the strong long-term performance of the sector, it is encouraging that more of advisers’ clients are gaining access to the sector. Clearly, some of the sector’s income advantages have also played a key role in attracting new investors, and recent AIC data gives some additional pause for thought. Our research into the UK Equity Income investment company sector based on a £100,000 investment showed that the annual income grew by an average of 5% per year over 20 years, more than 2 per cent above inflation (RPI), which averaged 2.9% over the same period. In addition, the capital value of the investment more than doubled to £222,315 – a 122% increase, again well ahead of inflation.

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