AIC remains 'cautiously optmistic' about RDR

Recently, the Association of Investment Companies (AIC) hosted one of its regular private investor roadshows, this time in Birmingham. These events have been running up and down the country for many years, however I was impressed not only by the numbers of investors that took the time to attend but also by the calibre of the audience: they posed questions that demonstrated a high level of understanding about investment companies and certainly challenged the panel.

In earlier years, these events were also staged for financial advisers but it became tough to attract attendees in sufficient numbers to make them viable. The success of Birmingham, as well as conversations with other parties over recent weeks, has got me wondering whether the arrival of the Retail Distribution Review in January 2013 means that we will see heightened demand from financial intermediaries for such roadshows and training events?

At the AIC we are busy planning for RDR and have formed a working party, which aims to provide a forum where a representative sample of our member companies can exchange views and information on the issues as they arise. We also intend that this forum will provide invaluable feedback on how RDR is going to impact on a variety of parties: financial advisers, product providers and platforms for starters.

We are cautiously optimistic that RDR will benefit investment companies and allow them to broaden their exposure. Certainly, for advisers who adopt independent status from the end of 2012, investment companies should be within the basket of products they consider on behalf of clients.

Between now and then (and thereafter), we acknowledge that there is a genuine need to develop and roll out a training and education programme for advisers who have not previously considered closed ended funds. Others may be familiar with closed ended fund structures but choose to deal only in OEICs and Unit Trusts. Certainly, the investment trusts sector is a minnow in comparison to the open-ended universe, the latter having more than £500bn of assets under management compared to around £90bn for investment companies.

Given that investment companies have such a long history (Foreign & Colonial Investment Trust was the very first to launch and traces its origins back to 1868) the poor level of understanding of their structure amongst many advisers is disappointing.

The perception that they are complicated can certainly be addressed by training, as the 'bells and whistles' that may appear to be off-putting can actually be real positives for advisers'clients. For instance, gearing (the ability for a company to borrow in order to make additional investments) can really add to performance over the long term.

The closed-ended structure of investment companies can also be a real plus as it allows the fund manager to take a long-term view when investing. Because the capital structure is fixed, there is no pressure for managers to sell assets they would rather keep when sentiment turns negative. This can be a real pressure for managers of open-ended funds as they may be forced sellers of stocks that they would much rather keep, should there be selling pressure from underlying investors.
 
Perhaps most significantly of all, the long term performance delivered by investment companies merits their reappearance from the shadows of their open-ended cousins. Over one, five and 10 years (as well as longer time periods) the average investment company has outperformed the average OEIC/Unit Trust. Investment companies tend to outperform when markets are rising so the exception to this performance story is three years – quite unsurprising when one thinks of the credit crunch and fallout from it.

We are keen to address both poor level of understanding and lack of familiarity with the benefits of investment companies amongst advisers. RDR allows us the impetus to do this over the next couple of years. By dovetailing our activities with other relevant groups we hope to provide a comprehensive educational programme that will convince advisers that the barriers they perceive are in fact reasons why they should be considering investment companies.

Ian Overgage is acting communications director of the AIC. The views expressed here are his own.