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The three fund issues investors and advisers disagree on

02 July 2014

FE Trustnet analyses the results of its latest survey for investors and advisers, which has seen very different responses to some of fund management’s most controversial questions.

By Joshua Ausden,

Editor, FE Trustnet

Investment trusts, absolute return funds and pensions are the three areas investors and advisers disagree on most, according to FE Trustnet’s 2014 investment survey in collaboration with Dianomi and Schroders.ALT_TAG

The research, which examined the views of more than 1,500 respondents across a range of issues, saw investors and advisers agree on a number of issues such as the outlook for the UK economy and the frequency at which they trade.

However, three controversial areas have thrown up some interesting differences of opinion, which Trustnet Direct’s John Blowers (pictured) analyses here.


1. Investors are bigger fans of investment trusts than advisers – but are things changing?


Investment trusts have long been popular with savvy private investors, but historically the fact they haven’t paid advisers commission has put them at a disadvantage in the financial services industry.

The Retail Distribution Review (RDR) banned commissions, thus putting investment trusts on a level playing field, although IFAs remain under-exposed compared with private investors.

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Our survey shows that 64 per cent of private investors polled by FE Trustnet have exposure to investment trusts, while only 38 per cent of advisers currently invest in them on behalf of their clients.

A quarter of IFAs said they were planning on investing in closed-ended vehicles, which suggests that RDR could well be looked back upon as a turning point.

This is emphasised by the fact that 32 per cent of advisers who use investment trusts first started buying them in the last 12 months.

Blowers thinks it is encouraging that advisers are buying investment trusts, but expects open-ended funds to remain the dominant force among IFAs.

“Trusts have a number of advantages over funds – they can gear, smooth out their dividend payments, and narrowing discounts give investors the opportunity to benefit from valuation discrepancies,” he said.

“If you look at the performance of trusts in recent years, they have broadly outperformed funds.”


Performance of sectors over 5yrs

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Source: FE Analytics

“That said, there is significantly less choice among open-ended funds and they are less marketed. They also need to be more competitive when it comes to their availability on platforms.”

“It’s been a good start since RDR came in, but there’s a long way to go.”

Blowers adds that trusts have come under further pressure from open-ended funds' introduction of  clean share classes.

“In the past, one of the advantages of trusts was that they were cheaper, but I’m not so sure you can say that any more,” he added.

FE Trustnet will look at the issue of investment trust charges in an upcoming article.


2. Investors are less likely to invest in pensions


Perhaps the biggest difference in the range of responses came when investors and advisers were asked which wrapper products they used.

The overwhelming majority of advisers said they use self-invested personal pensions (SIPPs) for themselves and their clients, with many also recommending company pension plans.

However, only 30 per cent of private investors polled use a SIPP, with an even smaller percentage investing in a company pension.

The results suggest that investors see ISAs as a better way to save for retirement, with more than 90 per cent of private investors saying they have at least one open.

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Source: FE Trustnet survey in collaboration with Dianomi and Schroders

Blowers sees ISAs as a very effective tool for investment, but fears that the results of the survey reflect a growing disillusionment with pensions.

“This is brewing into a major crisis, with a generation heading into poverty if they don’t address their retirement savings now,” he said.

“Why do you think the Government has made these sweeping changes to the long-term savings market, including higher ISA limits? They know that millions of middle-aged people are heading off the income cliff at retirement because they’re not saving now.”

Blowers says pensions are far from perfect, but he hopes that changes to the new system – which include the scrapping of annuities and a younger drawdown limit of 55 – will encourage investors to get saving.


“Let’s face it, the Government has made the state pension enough to stop people dying of poverty, but that’s as far as it goes,” he said.

“Once you strip out everyday bills such as electricity and water, we calculate that you’d have £64.82 a week – or £9.26 a day – to spend on food and general up-keep. Holidays? Forget it. Clothes? Ever wondered why there are so many charity shops?”

“People should look at it like planning a holiday. You don’t book one without having money ready to spend. I think a lot of people have very unrealistic expectations.”


3. Investors are more wary of absolute return funds


Many advisers use absolute return funds for their more cautious clients, with products that have specific risk and volatility targets particularly popular.

At £20bn, Standard Life Global Absolute Return Strategies (GARS) is the standout choice in the sector.

The survey indicated that Targeted Absolute Return was the most popular choice when advisers were asked which IMA sector they wanted to see more research on, with almost 50 per cent voting in favour.

Private investors were much more wary however, with this figure dropping by more than half.

IMA Targeted Absolute Return has been at the centre of significant criticism since it was first launched back in January 2010, with the majority of its funds failing to post a positive return in 2011.

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Others that have performed well have proved to be almost as volatile as equities, including CF Odey Absolute Return and City Financial Absolute Equity.

Blowers believes that investors need to be careful when picking a fund from IMA Targeted Absolute Return as there is such a broad range of strategies; however, he thinks the concept is a good one.

“A number haven’t done what they said they would and deserve criticism for it – particularly those that have taken on high levels of risk and had little chance of protecting against the downside in 2008 and 2011,” he said.

“That said, to tar them with the same brush is wrong. Investors need to look beyond the negative headlines and realise there are some very good funds at preserving and growing capital.”

“These are very useful for investors who have a short-term goal in mind – particularly with cash yielding next to nothing and bond funds faced with the real prospect of rising interest rates.”

Blowers believes that the majority of advisers interested in absolute return have opted for Standard Life GARS, which has been a good place to store wealth in recent years.

However, he thinks others deserve a mention.


Insight Absolute Insight has performed with a very low level of volatility in up and down markets, and other strong contenders include Henderson UK Absolute Return and Newton Real Return,” he said.

Performance of funds and indices over 3yrs

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Source: FE Analytics

“The last of these has delivered a positive return in nine of the last 10 calendar years, losing less than 1 per cent in 2011.”

“Invesco Perpetual Global Targeted Returns and the newly launched Aviva Multi Strategy Target Return funds are also interesting, but with a good mix of funds with a proven track record in the sector already, I think these are probably best watched from the sidelines.”

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