What is holding back investment trusts after RDR?


In the post-RDR world, investment trusts were set to thrive. The proven ability of the fund structure to provide strong dividend-producing portfolios and access illiquid asset classes has the potential to help investors meet income and diversification objectives. However, recently released Platforum data shows investment trusts have failed to catch fire. It is our view that access and cost barriers, as well as liquidity concerns, have hampered a greater take-up among advisers and investors.

Platforum data from the UK Adviser Guide shows that the majority of platform assets, 60 per cent, are invested in Oeics while 16 per cent of assets lie in unit trusts. The research then reveals a considerable difference for other fund structures – with only 1 per cent of assets are held in ETFs, down from 2 per cent, while only 1 per cent of assets held in investment trusts.

 Accessibility is a problem

The reality remains that investment trusts have yet to be widely embraced by advisers. Accessibility remains a major problem: neither RDR nor a demand tailwind has created an industry-wide impetus for platforms to build the infrastructure needed to offer investment trusts. Investment trusts are still unavailable on a number of major platforms.

It is vitally important that the risks of investment companies are understood, in particular the possibility of discount volatility. However, we believe demand for investment trusts will continue to grow as both retail investors and advisers better understand the advantages the structure provides. Education needs to improve in tandem with evolving platform access.

Whole of market solutions

Advisers have a requirement to consider all retail investment products, not just investment trusts, but also ETFs and other investment products available in the market. While advisers may decide that a particular asset class is not suitable for investors, the FCA’s directive is clear: independent advisers cannot ignore a product type for their clients just because it is not available on the platform they use.

We would therefore expect platforms to facilitate this necessity for advisers. With platform infrastructure having significantly developed over the past decade, it is understandable that advisers should expect ‘whole of market’ investment solutions.


Investment trusts are also addressing a more fundamental problem for investors: the hunt for steady streams of income. Investment trusts have been using their revenue reserves to support their dividend levels even when the underlying revenue has been impacted by dividend disappointments.

The fact that investment trusts are structurally more capable of providing greater dividend certainty has seen equity income mandates re-rated over the last few years.

Liquidity trends

Poor liquidity is also often used as justification to avoid the investment trust sector. It is important to first look at context when tackling the issue of liquidity in the investment trust sector – and whether certain trusts are viable options for platforms, advisers and wealth managers. For example, market capitalisation of £100m is often quoted as being the minimum size or liquidity proxy for a fund before it will be considered for client portfolios. Yet recent Winterflood Securities analysis shows that 68 per cent of investment trusts have a market capitalisation over £100m.

Furthermore, Winterflood’s recent research also suggested that 62 per cent of investors would be prepared to invest in funds with market caps of less than £100m, compared with 51 per cent last year. It is not entirely clear what has led to this shift but the Winterflood research team suspect that, while there is a preference for larger funds, a significant proportion of investors are prepared to be pragmatic and invest in smaller vehicles with growth prospects.

High trading costs

High trading costs often preclude investment trusts from consideration. However, by working with dealing and custody providers that can integrate cutting-edge technology, platforms can automate processes and aggregate trades. This reduction of manual intervention with straight-through-processing will bring down the costs of investing and unlock the potential of investment trusts and other securities such as ETFs for advisers and investors.

We are living in a new dawn. The new pension freedoms brought into effect on 6 April 2015 allow investors to drawdown from their funds instead of buying an annuity. People in the UK are also living longer and retirement provisions should reflect this demographic shift in terms of capital diversification and income requirements. If advisers are to keep up with changing client needs, platforms need to evolve and integrate to enable a wider and more cost-effective proposition.

Helen Oxley is head of business development at Winterflood Business Services