Why don’t advisers recommend investment trusts to their clients? The gross sales data on platform sales suggest that flows into these closed ended vehicles have failed to motor since the RDR.
For the forthcoming Platforum report UK Fund Distribution: Investment Trusts we have been researching why financial advisers are less prone to recommend investment trusts than their open ended cousins.
The most common objection we hear from advisers is their lack of liquidity.
There appears to be an almost universal perception that investment trusts cannot be held in model portfolios. The risk of a lack of liquidity at the rebalancing of a model portfolio is more than most DFMs and advisers can bear. Importantly, if DFMs are committed to re-balancing on set dates, they also have little control over whether they buy or sell the investment trusts at a premium or a discount.
The sticky issue of liquidity at the re-balance might be improved by fractional trading of shares. We are seeing some movement on fractional trading, spearheaded by Winterflood, although it is purportedly more complicated operationally to trade investment trusts fractionally than it is to trade ETFs.
We are also seeing evidence that more research agencies are offering robust research on investment trusts. And some major adviser firms are starting to include investment trusts on their fund panels.
But for the rare breed of financial adviser who is a significant user of investment trusts, lack of liquidity is perceived as a bit of an excuse. When one such investment trust enthusiast kindly gave me a lift to the station following an adviser roadshow, he was happy to share his scepticism on lack of liquidity. He believes that – as with ETFs – some investment trusts are illiquid. Nevertheless, many investment trusts are liquid: it is all a matter of doing the right due diligence.
Whilst we don’t expect investment trust sales to rival OEICs any time soon, we would urge advisers not to rule out investment trusts just because of the structural challenges in holding them. The perception that it is not possible to hold them in model portfolios may be the most vertiginous hurdle to clear. But our research suggests that there are ways of overcoming this issue – not least by adopting an old fashioned buy and hold approach.
Advisers may rate investment trusts and recommend them based on sound due diligence or they may not: we are agnostic on this point. But platforms, market makers, research agencies, and the investment trust providers themselves could do more to smooth the path for advisers to recommend them. It really might be a case of: ‘If you build it, they will come.’
If you have any comments or thoughts on our investment trust research, do get in touch.