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Raise your hand if you use investment trusts

Advisers are increasingly buying into investment companies, following well-known managers like Investec’s Alastair Mundy, writes Jemma Jackson of the Association of Investment Companies

Followers of the sector will already be aware that adviser purchases of investment companies have been steadily on the up since we entered that brave, new post RDR world – albeit from a low base. Quarter two this year was the second highest on record, with advisers if not gobbling up investment company shares, certainly getting an appetite for them. This year’s quarter two was second only to the record breaking quarter two 2015, which had in large part been boosted by the launch of Woodford Patient Capital.

Yet it was still encouraging, at our most recent AIC adviser seminar, to see three quarters of the audience raise their hands when asked if they were already using investment companies. Preaching to the converted, perhaps, but still a world away from the handful we would see raised a decade ago.

Someone else holding up his hands at last week’s seminar was Alastair Mundy, who has managed Temple Bar Investment Trust for 16 years – the theme of his presentation being admitting mistakes. One of the great things about fund management, he said, is that you can talk about things you’ve done wrong and lessons learned. You wouldn’t, by way of contrast, find too many football managers admitting to having bought the wrong player. Mundy was his usual modest self when it came to his own fallibilities, too – and he certainly refrained from mentioning Temple Bar’s 32 years of uninterrupted dividend increases, nor the impressive long-term performance over his tenure. But then the figures speak for themselves.

In any case, Mundy wasn’t there to talk up his performance, or markets either, for that matter. Temple Bar has 10% in cash, because he’s “waiting for better opportunities” and about 6% in gold and silver, and he thinks US equities are expensive, commenting that “they’ve only been more expensive twice before; in 1929 and 1999 – and it didn’t end well.” He worries about inflation because it has a “horrible habit of creeping up on you and hitting you over the head” and he also thinks historically low interest rates could come back to bite policy makers: “When they’ve used up all their toys, they will need new ones”. On the plus side, Mundy likes banks, because he thinks they are going to be profitable, and will pay this out in dividends. Mundy said it’s always good to have a ‘devil’s advocate’ in the office as an essential check and balance, and I did find myself wondering if that might be him.

In any event, companies such as Temple Bar continue to deliver impressive dividend track records come rain or shine. Personally I like to think that whether you’re a ‘value investor’ biding your time, a football manager waiting to bag some undervalued players (Leicester City springs to mind), or someone who likes to wait for the January sales to buy your winter coat, there are always bargains to be had along the way, come what may.

Clearly ‘discounts’ in the investment company sector have seen a good deal of variation over the course of the year to date, but have ended close to where they started the year. Certainly discounts in the income-focussed investment company sectors are, in the main, back to their pre BREXIT referendum levels. After some discount volatility in the aftermath of the vote, the average discount is now actually narrower than where it started the year (2.7% at end August compared to 3.7% in January). Clearly the sectors’ high overseas exposure amidst sterling weakness has been a boost, whilst equities, despite the risk/reward trade off, will perhaps inevitably retain their income attractions in a low interest rate environment. Sale time is over it would seem – for now at least. There will be ups and downs along the way, but we have come a long way with advisers over the last few years and we look forward to meeting many more at our roadshows across the country.

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