The manager of the Thames River Distribution fund says that the secondary status of closed-ended funds versus their unit trust and OEIC peers makes them more difficult to trade. "The weakness of old-fashioned investment trusts is the lack of brokerage," he explained.
"Investment trusts are something of an acquired taste which means they are much more difficult to market than open-ended funds. Investors are always going to opt for the low-hanging fruit."
Furthermore, Potter believes that the problem has been exacerbated by the global financial crisis.
"When I came into the market there were seven or eight market makers of a decent size," he said.
"Now there are far fewer. The credit crunch has caused brokers to take fewer investment trusts on their books."
Proponents of investment trusts argue that the closed-ended structure gives managers an edge because they don’t have to contend with the ebb and flow of sales and redemptions and can therefore take longer-term positions.
However, Potter claims that investors are overlooking other drawbacks to their structure.
"A limited number of shares, as well as a shortage of brokers trading them, means that it can be very difficult to get out of investment trusts once you are in them," he explained.
"Anybody can buy, you just bid a penny higher, but selling meaningful amounts can be a nightmare."
Investment trust investors also point to the advantage of low charges that closed-ended companies have over their open-ended counterparts.
FE data shows that the average total expense ratio in the AIC universe is 1.37 per cent while in the IMA universe it is 1.55 per cent.
The impact of higher charges on long-term performance has been highlighted by several FE Trustnet studies, which show that investment trusts tend to outperform their open-ended rivals in the long-term.
However, Potter says that these advantages are heavily diluted if investors cannot trade when they want to.
"One can conclude that investment trusts are the better vehicle because of fees but that is generally not the case," he explained.
"You may very well be able to get access to an asset class more cheaply via an investment trust but you can find that you don’t get the performance because you can’t find a buyer when you want to sell."
AWD Chase de Vere’s Patrick Connolly agrees with the manager’s concerns and warns other IFAs that even open-ended funds can cause some liquidity headaches when markets turn and it is time to trade out.
"For larger investors like discretionary managers and IFAs, liquidity is a real issue," he said.
"We typically don’t invest in any vehicle – open- or closed-ended – with less than £100m in assets under management. When we make trades it is not to move one or two investors but to take all of our investors out of one fund at once."
Despite these concerns, Potter says he takes all investments on a case-by-case basis and that there is still a place in his portfolio for a number of specialist investment trusts.
Potter owns three infrastructure closed-ended portfolios, including the top-performing John Laing Infrastructure and 3i Infrastructure funds. He also owns Medicx, a portfolio of doctors' surgeries.
To counter his concerns over liquidity, the manager has only taken up a small position in these companies but he believes the closed-ended structure is well-suited to sectors that focus on tangible hard assets.