More financial advisers and wealth managers are buying investment trusts than ever before, according to new data.
After decades when investment trusts were largely off the radar of financial advisers making investments on their clients’ behalf, the tide has well and truly turned.
New data published by the Association of Investment Companies (AIC) finds more advisory firms and wealth managers are buying investment trusts than ever before, with £968 million worth of shares purchased in the first nine months of 2021, a 28% increase on the £754 million bought in the same period in 2020.
Extrapolating figures for the full year of 2021 suggests total sales of around £1.29 billion, compared with £1.05 billion in 2020.
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Not only has the value of sales risen, but the number of firms making use of investment trusts is also on the up. From around 200 advisory firms buying trusts in 2011, the data shows that in the third quarter of 2021, a record 2,157 purchased them, beating the previous record of 2,014 firms set in the third quarter of 2016.
That flurry of interest in investment trusts in 2016 was a result of the suspension of several major open-ended property funds in the aftermath of the Brexit vote, pushing advisers to look to investment trusts for alternatives. Numbers dropped back slightly over the following couple of years – but since 2018 they have risen sharply.
Change of heart
What’s driven this gradual change of heart among advisers over the past decade? It’s rooted in the dramatic changes to the investment landscape with the introduction of the Retail Distribution Review (RDR) in 2012.
Before that date, advisers were paid initial and ongoing commission by fund management companies (out of client money) on investments into their open-ended funds.
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In contrast, investment trusts paid no commission because of their structure as companies listed on the stock exchange, with an independent board of directors operating in the interests of investors and negotiating fees with the fund manager.
Prior to RDR investment trusts had a well-established market with many seasoned self-directed investors investment trusts and a number of discretionary wealth managers – who liked the various structural advantages trusts have over funds.
Playing field levelled
The RDR did away with third-party commission on open-ended funds, levelling the playing field in terms of fees. But it has nonetheless taken time for the attractions of investment trusts to be recognised by financial advisers.
That’s partly because many advisers were initially unfamiliar with them and viewed them as complex and higher risk investments, and partly because they were not immediately available on the main investment platforms used by intermediaries.
As Nick Britton, head of intermediary communications at the AIC, explains: “Since the RDR we’ve seen an upward trend in the number of firms buying investment companies on adviser platforms – from around 600 in 2012 to over 2,000 in these latest figures.”
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He adds: “The rising popularity of investment companies with advisers and wealth managers shows growing appreciation of their structural advantages, from the ability to deliver consistent income to their flexibility in accessing property, infrastructure and other alternative assets.”
At Milestone Wealth Management, principal Neil Mumford says the firm started using investment trusts some years before RDR, as a result of his own personal interest in them. Typically, he adds, trusts comprise around 20-25% of the income-focused client portfolios and 10-12% of the growth portfolios.
“We use large generalist global trusts such as Bankers (LSE:BNKR), Monks (LSE:MNKS), Witan (LSE:WTAN) and Scottish American (LSE:SAIN) in virtually all our portfolios, alongside multi-asset and global funds,” he says. “If we were asset allocators, we would use them for alternatives such as private equity and infrastructure as well.”
As long-term investors, Mumford and his team are also fans of the closed-ended structure and the fact there are no worries that the manager might have to sell assets if there’s a run on the fund. “We particularly like the longstanding dividend heroes for income portfolios because of their ability to produce reliable inflation-proof income for clients,” he adds.
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