Demand surge for ITs masks accessibility problem

Investment trusts are on the rise. According to a recent report from the AIC, adviser purchases of investment companies on platforms have more than doubled since RDR. These are positive developments in terms of widening the asset universe. However, the surge in demand masks a fundamental problem. Despite RDR heralding a level playing field, in reality, investment trusts have yet to be widely adopted by advisers.

Helen Oxley, head of business development at Winterflood Business Services

What emerges from analysing the AIC data is that the increased demand derives from a very low base. Accessibility is still a big problem: neither RDR nor a demand tailwind has created an industry-wide impetus for platforms to build the infrastructure needed to offer investment trusts.

Two factors have exacerbated this. Firstly, investment trusts are still unavailable on a number of major platforms, and secondly, high trading costs often preclude them from consideration. With platform infrastructure developing significantly over the past decade, it is understandable that advisers should expect ‘whole of market’ investment solutions.


Source: Association of Investment Companies

We believe demand for investment trusts will continue to grow as both retail investors and advisers better understand the advantages that the structure provides. These advantages include: further access to alternative asset classes, as well as steady streams of income and greater dividend certainty. In addition, investment trusts have historically benefited from lower fees than equivalent open-ended funds. This advantage has been eroded to an extent by RDR and the advent of ‘clean-pricing’ for openended funds. However, many investment trusts have responded by reducing or simplifying their fees to preserve the advantage.

It is, however, vitally important that the risks of investment companies are understood by investors – in particular, the possibile volatility between the trust’s net asset value and the share price. Nevertheless, it is telling that the majority of investment company IPOs since the start of 2009 are currently trading at a premium.

We are living in a new landscape. The new pension freedoms brought into effect last month, allowing investors to drawdown from their funds instead of buying an annuity, have put an even greater emphasis on income-generating assets. People in the UK are also living longer – retirement provision should reflect this demographic shift in terms of capital diversification and income requirements. If advisers are going to keep up with changing client needs, platforms need to evolve and integrate to enable a wider and more cost-effective proposition.