"Analysts are increasingly asking why IFAs aren’t using them as much as they should," said Baillie Gifford’s James Budden. "Their outperformance versus open-ended funds is a strong enough argument alone before you consider other benefits such as charges and the ability to gear."
In today’s market, open-ended unit trusts make up the vast majority of investors’ portfolios but under the terms of the Retail Distribution Review (RDR), which comes into effect on 31 December 2012, IFAs are obliged to recommend suitable products from the entire range of those available, including investment trusts.
Research from FE Trustnet shows that in 2011 the performance of investment trusts trounced that of their open-ended counterparts and analysis also suggests it is a similar story over the long-term.
Budden, director of retail marketing and distribution at Baillie Gifford, says that because investment trusts aren't yet available on many fund platforms there is still some way to go before they are sold as readily as OEICs.
"The RDR means that people will become much more aware of investment trusts and the role they should hold in a portfolio but a real boom depends on whether distribution via the platforms can become more mainstream," he explained.
"The problem is that the platforms are busy getting their house in order to comply with RDR and investment trusts appear to be further down their list of priorities but soon the industry will evolve to make investment trusts as easy to access as equities. The platforms are increasingly bolting on brokerage roles to their businesses."
After a wide-scale exit of institutional investors from closed-ended products, Budden is convinced that there is a huge hangover of stock demand waiting to be bought by retail investors. All that is needed is a catalyst.
"The key to the revival of the investment trust space is the IFA market. Post-RDR one hopes that there will be a step-up in demand for closed-ended funds to be more readily available via the platforms."
"Advisers who wish to maintain their status as independent will have to look at the whole of the market and this should create a tremendous opportunity for Baillie Gifford in the closed-ended space. Over the next 18 months we anticipate demand to increase and, as a result, discounts will narrow."
Baillie Gifford is regarded as one of the market leaders in the closed-ended fund space. Data from FE Analytics shows that the group’s flagship £1.8bn Scottish Mortgage Investment Trust has returned 139 per cent over the last decade versus 90.86 per cent from the average Global Growth trust. It has offered this return with a headline TER of just 0.5 per cent.
Performance of fund vs sector over 10-yrs
Source: FE Analytics
Budden commented: "Where Baillie Gifford differs from other asset managers in the retail space is that it is investment-trust led. We look at unit trusts and investment trusts as one joint retail offering but the balance of power lies with investment trusts as that is what the business was founded on."
"Investment trusts are outperforming their open-ended peers at a very modest price. They offer something a bit different to the funds in the increasingly squeezed OEIC market where a huge number of funds are little more than closet trackers."
Our data shows that the average TER in the AIC Investment Trust universe is just 1.34 per cent, compared with 1.55 per cent from the average open-ended fund.