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AIC urges regulator to open up market for trusts

23 February 2017

In its submission to the FCA’s asset management study, the Association of Investment Companies says there could be a “market failure” in the fund industry.

By Rob Langston,

News editor, FE Trustnet

The Association of Investment Companies (AIC) has urged the UK financial regulator to act over what could be a “market failure” in the funds sector.

In its submission to the Financial Conduct Authority (FCA) study, the investment trust trade body noted that, despite a strong track record, investment companies are a “far smaller part of the market than their open-ended competitors”.

The regulator opened its study for consultation in November 2016, seeking views from the industry on a range of issues.

Ian Sayers, chief executive of the AIC, said: “Active management in the investment company industry delivers strong performance for consumers.

“Investment companies have beaten their benchmarks more frequently than open-ended funds over the medium and long term.

“Investment companies are also most likely to outperform open-ended funds with the same manager over five and 10 years.”

 

Source: AIC

The AIC claimed that while performance had often been better than open-ended peers, investment companies could go overlooked for several reasons.

“When potential concerns about holding investment company shares are considered in context they are often less significant than is sometimes claimed,” it reported.

“This suggests that fund promoters and investors are often blinded to the benefits of the sector because of force of habit or market practice, rather than undertaking a measure assessment of the pros and cons.”

Among recommendations, the AIC called on the regulator to change the competitive dynamics of the market and asked that firms be required to consider which fund structure provides “the best opportunity to secure long-term investment performance given the funds’ underlying assets, investment strategy and, if it is open-ended, redemption policy”.


While the regulator had highlighted underperformance of benchmarks by both passive and actively-managed open-ended funds as a reason for looking at how the fund are governed and promoted, the AIC claimed it should look at mechanisms to achieve a greater range of fund structures to make the funds sector more competitive.

“Investment companies operating in equivalent sectors have beaten their benchmarks more frequently than their actively managed open-ended counterparts over three, five and 10 years,” the AIC noted.

It also cited research by Canaccord Genuity that found investment companies, on a five and 10-year basis were likely to outperform their open-ended sister fund in NAV terms.

 

Source: AIC

Contributions to performance are likely to come from full asset allocation, gearing, lower costs or more stable exposure to preferred stocks, the AIC noted.

Henderson Global Investors manager John Bennet, who manages the closed-end Henderson European Focus trust as well as a number of open-ended vehicles, said the structure can offer managers greater flexibility and protection against redemption requests.

"I happen to believe that investment trusts are the very best, bar none, vehicles for investors," he said. "I mean that in the ownership of the trusts – the shareholders – but also for the fund managers.

"Trusts are an absolute delight to manage mainly because they are closed-end, they don't get hit with redemptions, you don't have to keep buying and selling things."

"Also, because it is closed-end you can take days or weeks to build or exit a stake, because you know you'll never get a redemption and forces out of a position."


In its consultation paper, the FCA also raised the issue of the introduction of an all-in fee for funds, something that the AIC does not believe would benefit the sector.

It noted: “It would not be desirable or practical approach to impose an ‘all-in fee’ on investment companies.

“The basic mechanism envisaged by the FCA seems to be that, if the set fee level is breached, then the asset management firm would pay the difference out of its own resources. This is problematic for the investment company sector.”

It noted that service providers were contracted by the closed-end vehicles and highlighted the lack of a pool of resources available to draw down upon.

Part of the difficulty in comparing closed-end vehicles with open-ended funds is the difficulty of comparing costs.

Patrick Connolly, head of communications at financial advisory firm Chase de Vere, said: “In terms of charges always been difficult to compare between open-ended funds and investment trusts.

“What we need is more transparency and there needs to a way that investors are better able to compare not just charges of open-ended fund but also investment trusts.”

He added: “Over the long-term we expect investment trusts to outperform open-ended funds in part because of gearing.”

However, Connolly said that in the short term trusts can be risky and more volatile because of gearing and the discount/premium issue.

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