May 2012


Ian_SayersMany of the earlier investment companies started life as bond funds – the move into equities did not really begin until the Great Depression of the 1930’s forced investors into shares because of bond defaults. Today, investment companies predominantly invest in a portfolio of shares to spread risk for investors, although they can also invest in illiquid assets such as property and private equity, as well as bonds. Investment companies are still popular with sophisticated private investors and wealth managers. While they can more than hold their own when it comes to delivering superior long-term performance, when it comes to assets under management they have long been eclipsed by the open-ended sector – unit trusts and latterly, Oeics (open-ended investment companies).  The first unit trust was launched in 1931 by M&G Investments. Some 63 years later, the unit trust industry’s assets had overtaken the investment trust industry’s and are larger, at around £600 billion (€731 billion). This contrast may seem like something of a head-scratcher, especially considering that the investment company sector has routinely outperformed the open-ended sector over the long-term, as countless analyst research notes demonstrate.  Some advisers have expressed caution because investment companies, being listed on the stock exchange, can be affected by market sentiment as well as the performance of the underlying assets.  On the flip side, this has inspired enthusiasm among those investors keen to buy a portfolio of assets for less than their actual worth. Investment companies are valued by their share price and can trade at a discount or a premium to the net asset value per share (the value of the underlying assets, less debt, divided by the number of shares in issue).  If the share price is lower than the net asset value per share, the investment company is said to be trading at a discount, but if it is higher, it is said to be trading on a premium. The average member of the Association of Investment Companies (AIC) was trading on a discount of 8% at the end of February 2012, although some of the investment companies in the coveted higher income paying sectors are regularly trading on premiums in the current low interest rate environment. Gearing is another aspect that has led some to shy away. Investment companies can borrow to enhance returns and, while this has helped the sector to outperform over the longer-term, it can also give investors a bumpier ride. Some commentators have another view on why the growth of investment companies has lagged behind that of the open ended sector: the fact that investment companies do not generally pay commission.  But, things are about to change. The Financial Services Authority’s Retail Distribution Review means that from next year, a new advice regime will be in place. Commission will be a thing of the past and if they are to retain their “independent” label, independent financial advisers must consider the likes of investment companies. We are not expecting radical changes overnight, but this is the single biggest, long-term opportunity the sector has seen and the AIC is working hard to help advisers in the run up to next year.  Of course, we have other challenges to withstand, too. The AIC continues to face “a regulatory avalanche” following the financial crisis, for example, the Alternative Investment Fund Managers’ Directive is an on-going process with a European implementation directive expected by July. When the AIC was formed in 1932, a good deal of our work was focused on the numerous bond defaults created by the Depression. Some 70 years later, much of our lobbying is in response to European regulation brought to bear due to the global financial crisis. Things have come full circle, but the sector is well placed to deal with whatever challenges and opportunities lie ahead. Ian Sayers is director general at the Association of Investment Companies ©2012 funds europe

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