Freedom break

After a decade of limited growth, managers of investment trusts hope that the Retail Distribution Review, with its demand for wider product awareness among IFAs, will snap the funds out of their tight customer base. Will Jackson reports.

One product that does not seem ready for rehabilitation, however, is the split capital investment trust. The split cap sector collapsed in 2002 as it emerged that a “magic circle” of managers had taken on too much debt and invested in other trusts, thereby increasing risk beyond expected levels. The crisis prompted a lengthy and damaging Financial Services Authority (FSA) investigation, and efforts this year to drum up interest in the sector failed, as Invesco Perpetual postponed its Dual Return fund.

Watkins says the firm may consider launching the fund at a later date. “It’s not simmering on our back burner, but it has not been binned,” he adds. “It is amazing how many people I speak to remind me of that split and say: ’if you’re thinking of doing it again please let us know’.”

Watkins says the structure, which separates income and capital, remains attractive – particularly in light of recent tax changes.

In addition to looking at launches, both Watkins and Davies say their firms will consider bidding for management contracts of established funds. “The industry has talked about consolidation and the need for some of the smaller trusts to do something about their size and status, and there will be opportunities for fund houses in that area,” says Davies.

“If a distressed vehicle out there was up for tender, we would be interested. While we won’t launch investment trusts for the sake of it, we would be keen to grow our business when opportunities allow.”

Looking at demand for investment trusts in a broad sense, the industry should benefit from the RDR, which aims to remove the commission bias that encouraged the rampant growth of the open-ended fund industry. Under the rule changes, independent advisers will be expected “to conduct a comprehensive and fair analysis of the wider range of retail investment products”, including investment trusts.

An important related development will be the introduction of investment trusts on to the major fund platforms. The “big four” supermarkets – Cofunds, Fidelity FundsNetwork, Skandia Investment Solutions and Hargreaves Lansdown – account for an estimated 85% of assets under administration on platforms, and Davies and Barron say wider distribution would have a positive impact on the profile of the sector. Both men are tempering their enthusiasm, however, pending clarification on the FSA’s platform review. A policy statement is expected by the end of the year.

Of the big four, Hargreaves Lansdown already offers investment trusts, while Skandia expects to include the funds “well in advance of the RDR being implemented”. Cofunds also confirms that it will add trusts to its platform but declines to give a timescale. Fidelity, meanwhile, says it will consider including the funds “if and when adviser demand warrants making investment trusts available via Funds­Network.”

A JP Morgan Asset Management survey of 148 investment trust ­directors, published last November, found that greater mainstream ­distribution of closed-ended funds was viewed as “critical to the survival of investment trusts”.

More than 40% of the directors polled regarded platforms as the primary channel for future sales, with about one-third choosing IFAs. Wealth managers, private client stockbrokers and private client managers were viewed as less important sources of business.

Indeed, the AIC has formed a working party to develop strategy in relation to the RDR, and in a statement last week the association emphasised the importance of raising awareness of investment trusts among IFAs, as well as wider distribution via platforms. “We are certain that education will be vital, since most advisers restrict their offering to open-ended funds,” it said. “We are keen to work with other relevant parties to provide suitable training initiatives, and this is one of our key priorities.”

Commentators agree that the RDR is a positive development for the investment trust industry, but are less certain that the changes will have much impact.

“I don’t think it’s a big bang,” says Davies. “There’s no commission for the majority of investment trusts and there will be no commission payable on other products for IFAs, so that ­levels it up. Can I see IFAs suddenly flocking to sell investment trusts over Oeics and other investment products? No, I can’t. It just increases their number of options.”

Watkins is similarly cautious. While he acknowledges that the RDR will “level the playing field” for the closed-ended fund industry, he questions whether or not IFAs will have the time or the inclination to deal with the intricacies of investment trusts.

In contrast with the results of the JP ­Morgan Asset Management poll, Watkins expects private client managers and individuals to continue supplying the majority of demand.

“Private wealth managers like the ability to buy and sell these things on the market – to be able to play the discount game,” says Watkins. “Looking across our 12 registers, 25 or 30 firms continue to dominate pretty much all of them. So that remains our principal and target market. They’re not suddenly going to buy more because they’re already – if you like the phrase – ’RDR compliant’. They’re agnostic about product.”

Barron, however, is upbeat on the prospect of the review and says his firm is working closely with advisers, with the aim of diversifying its investor base.

“There is a clear structural performance advantage that investment trusts offer, and we’ve got to go out and sell that,” Barron says.

“I would say I’m as optimistic about the future as I have been for some time. It’s a good time to be a manager of investment trusts.”