Investment company sector in the spotlight

The investment company sector has been very much in the spotlight this ISA season, with the news that Anthony Bolton's much anticipated launch of Fidelity China Special Situations is going to be a listed investment company.

This goliath of a company is looking to raise £630m or $1bn, which would make it the largest closed ended launch for three years, and the largest investment trust launch for even longer.

It is a great vote of confidence in the closed ended structure, and the fixed pool of assets should give the manager a good deal of flexibility, not to mention the ability to sensibly manage the size of the fund. The use of a performance related fee arrangement for the new Fidelity launch has been picked up by some in the media. In fact, performance fee arrangements are nothing new to the investment company sector.

AIC research suggests that 54 per cent of investment companies currently have a performance fee in place (of the 255 investment companies assessed), and of these, 35 per cent paid the fee over the year to 31 December 2009. With interest rates remaining at historic lows, and yield still hard to come by, not to mention the impending tax increases for the highest rate tax payers, it is a challenging time for investors looking to make the most of their savings.

The ISA structure remains an important financial planning tool, and it is also worth taking into account yields.

Whilst a number of big high street name companies have announced a cut in their dividends in these tough economic times, the investment company sector continues to have an impressive track record, on average, as far as maintaining or increasing dividends is concerned. Some 15 investment companies have managed to increase their dividends each year for 26 years or longer.

Topping the list of year on year dividend increases again this year is City of London Investment Trust, which has increased its dividend payments for an impressive 43 years in a row. Following closely behind are Alliance Trust, Bankers Investment Trust and Caledonia who have all increased payments for 42 years.

In addition, a further 31 investment companies have been able to increase their dividends for at least each of the last 10 years, a track record which is hard to beat outside the investment company sector.

Investment trusts tend to be in a strong position when it comes to dividend payments because they are able to retain some of the income they receive each year and transfer this to their revenue reserves.

They can build up their revenue reserves during the good years to allow them to pay dividends in difficult years – known in the industry as 'smoothing dividends'. This is one of the unique advantages of the investment trust structure.

The investment company sector also remains good value for money, with almost a third (30 per cent) having a total expense ratio of below 1 per cent. In recent years there has been a tendency among boards to reduce the management fee but introduce a performance related fee element.

Whilst only one of many criteria to bear in mind, charges are worth taking a look at because they can have an impact on the bottom line, although there are many other important aspects to consider.

The impending Fidelity launch comes at a good time for the investment company sector, and should be a useful reminder of the many attractions of investment companies – the flexibility to gear up (or borrow) to enhance investment opportunities being just one of them.

Only time will tell if it will also mark the start of a fresh round of launches across the investment company sphere, but with 142 years of history behind it, the investment company sector still has a good deal of attractions for investors.

Annabel Brodie Smith is communications director at the Association of Investment Companies. The views expressed are her own.