This article is part of Morningstar’s Guide to Investment Trusts, highlighting the benefits of these unique investment vehicles – busting the investment trust jargon, revealing potential pitfalls and celebrating those experienced managers who have earned the top ranking from Morningstar fund analysts.
Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and here with me today is Ian Sayers, Director General of the Association of Investment Companies.
Hello Ian.
Ian Sayers: Hi.
Wall: So, we are here today to talk about investment trusts. We are running an Investment Trust Special Report Week this week. What is an investment trust?
Sayers: Well, an investment trust is a type of collective investment funds. So, like all collective investment funds, you get a group of investors together, they put their money into a single fund and then that's handed over to a professional fund manager who invests in a wide range of different investments to spread risk. One of the key differences though to other kinds of funds is that the way you buy and sell your shares in the investment trust is by going through the stock exchange.
You go to a broker and you buy those shares and with the emergence of online share dealings such as these days, it's very, very easy and quick and cheap to buy and hold them through these services.
Wall: And that's called a closed-end fund, isn't it, because you need a buyer and a seller in order to make a transaction?
Sayers: Well, that's really one of the key differences. Because you're actually trading the shares backwards and forwards on the stock market, we call that closed-ended and that means there is no disruption on the underlying portfolio. So, the fund manager doesn't have to be worried about being asked to give money back to investors if they want to leave the fund and that's good because it means they can remain fully invested.
They don't have to just hold cash inside the fund in case investors want an exit, but it also means they don't have to just invest in things that they can sell very quickly. So, one of the key advantages is they can invest in illiquid asset classes, things like property or private equity which can be a little bit more risky in the short term but over the long term tends to have a very strong performance record.
Wall: Talking then about performance, there are some investment trusts out there that have been around for over 100 years and have continued to deliver through market cycles. Unfortunately, investment trusts don't seem to be as well-known to the public as this performance history suggests they should be. Why is that?
Sayers: Well, I think there's two sides to that. I mean, there's sort of retail investors and one of the things about investment trusts is that they tend to be quite careful about how much money they spend on things like advertising and marketing et cetera. So they haven't tended to have the big appetizing campaigns that some of the other investment houses might do for their open-ended business. I think that's one thing.
I think where financial advisor is concerned, there is much more specific reason. Until relatively recently financial advisors tended to be remunerated by the payment of commission. Investment trusts for various legal reasons couldn't pay commission as freely, so they didn't and then they tended to be ignored a bit more by the financial advisor community. That's all changed now. There have been changes to the rules. The payment of commission has been banned altogether and that's why in the last couple of years we've seen quite a big increase in the take-up by financial advisors. In fact, since those reforms came into place the amount of recommendations of investments trusts has more than doubled.
Wall: You are Director General of the AIC. Is this one of your roles then to promote investments trusts to retail investors?
Sayers: Yeah, absolutely. We have a variety of different roles. We do a lot of work on the lobbying side dealing with the mountain of regulation that comes down, we give technical advice to our members. But one of the newer areas that we've got involved in is particularly because of these changes to commission.
We've been doing a lot of work training financial advisors and so giving them the education or knowledge so they can now because they are not worried about the commission issue they can actually have sort of the understanding to feel confident about recommending them and we are seeing that beginning to happen.
We also do the same with the retail investors. We have revamped our website. Our consumer materials, et cetera, just trying to make things hopefully clearer and more simple and again, we've seen a lot of increase in almost every month that goes by. We've got a record number of people visiting our website.
Wall: Volumes in investment trusts, hopefully, that's going to increase. Does that pose a problem or an opportunity for an investment trust manager?
Sayers: I think mostly it's an opportunity. I mean, there has been the case in the past that maybe some funds have been a little bit small in size. One of the good things about investment companies is that as they grow, they don't just keep charging the same price to the investor. So, actually most boards have independent Board of Directors. So, what you see a lot of tiered rates of fees.
So, in other words, as they grow the funds gets relatively speaking cheaper for the investor. So, they have been growing and the last two years have been record years for fund raising. So, they have actually been able to get that scale and because of that scale they are actually passing some of the economies of scale on to the investor. In other funds, I'd have to say, the price just remains the same no matter how big the fund gets and to be honest, it isn't. If our fund doubles in size, it's not twice as expensive to run. So, I think that's a good thing for investors.
Wall: Ian, thank you very much.
Sayers: Thank you very much.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
