Funds Europe – We know that open-ended funds are often the default choice for many UK investors. Colm, I was just wondering if you could kick us off here about the sales perspective. What needs to be done to broaden the appeal of investment trusts?
O’Brien – To me, it’s back to the illiquid asset side. As I say, the amount of capital that’s flowed in has created a boom. It’s come from the asset owner community: the sovereign wealth funds, the large pension funds – in the US in particular – and the Asian investors.
That boom is going into private capital structures, mainly in Luxembourg and the Channel Islands. Ireland is at a standing start in that journey through a new ILP (Investment Limited Partnership) structure they have.
What do investors want? They want a return, and they want it over the longer term. They don’t want the flux that comes with either a long-only structure in bonds and equities where you can see returns wiped out very quickly. On the hedge fund side, investors typically pay higher fees in exchange for higher returns, but there’s been no volatility in the market so hedge funds haven’t been performing. That’s why so many investors are turning to private capital and the UK investment trust is a strong candidate vehicle to access those assets. Combined with the growth in investments related to environmental, social and governance (ESG), there is a solid base, a long history, and many characteristics of the investment trust structure that should allow it to flourish and prosper.
Moore – Financial education is so important, and it’s about going out and actually shouting about the advantages of the investment trust structure. This type of forum, and actually what Covid has done is it’s forced us all to reinvent the way we work and the way we broadcast what we’re doing, and Annabel and the AIC have been very influential in that sense, making sure that we have a voice as investment trust managers and that we go out and tell people what we’re doing, and the advantages of the structure.
With my investment trust, Aberdeen Standard Equity Income Trust, if you have a look at the shareholder register, you’ll see that the direct-to-consumer brands have grown massively in the last two, three, four years, and that’s a really important segment. We need to be targeting those customers as well, because those are customers where there’s a real gap, and through no fault of these customers. They have obviously been receiving a service which is broadly speaking actually quite bare minimum in terms of a lot of platforms just seem to have been providing a home for your investments, the settlement, the custody and the front end, and we’re trying our best to get through to those investors as well, because we want them to hear what we’re doing.
Brodie-Smith – There are a few things that I’d like to address. Colm was talking about the appeal of investment trusts for institutional investors, particularly in the alternative asset space. That’s really important. If you look 20 years ago, perhaps 80% of our sector was equities, 20% alternatives. It’s now 60% equity, 40% alternatives, and that shows the growth in that sector and the appeal to institutional investors of alternative assets as well as some retail investors too. Thomas has been talking about the importance of retail investors – it’s been an incredible growth market for the investment company industry, with investors managing their own money and doing their own research on platforms. What we find is once they’ve found their way to investment companies, investors generally really like what they find. What we’ve got to do is get the message out there to more investors. We’re in a situation where the FCA [Financial Conduct Authority] itself is saying that the private investors have got too much money in cash, they need to get it invested. It’s a once-in-a-lifetime opportunity for our industry to get out and trumpet our wares and our benefits to investors.
About 10% of advisers recommend investment companies, and this is an area which clearly should be a lot higher. It’s increased fivefold since RDR [the UK’s Retail Distribution Review] from around £200 million on adviser platforms to over £1 billion now, but that is an area where we should see a lot more growth. We have been providing training at the AIC, getting the message out there. We’ve spoken to nearly 10,000 advisers and wealth managers now.
O’Brien – It’s incumbent on everybody, including the service providers, to assist in that. I know it’s often overlooked but custodians have massive resources, and massive amount of data, and if you have the resources and the underlying data to start analysing what has gone on within a particular product or a particular region, that can be very powerful.
BNP Paribas have put in a lot of support to help investors understand the investment trust market so that we – and it – are more compelling. It’s incumbent on us to do so. We support 10% or 15% of the AuM [assets under management] of the investment trust market in the UK. We want to grow that, and the industry itself will benefit from a global player like BNP Paribas being involved.
Brodie-Smith – Yes, we need to continue to work together as an industry. It’s great that BNP Paribas have come into the industry, but yes, we need to work together and get that message out there.
Unfortunately, advisers think, ‘I’ve got this nice open-ended fund, why really do I need to transition to an investment company?’
There have been internal issues around their research processes within their firms or networks, and platform availability and pricing is still an issue. Those are, I would say, the key barriers to investment companies for advisers.
We have a great opportunity now. We’ve seen the problems of the open-ended property funds, interestingly post-Brexit when the open-ended property funds suspended, then we saw a huge rise in purchases of investment companies and property REITs from advisers. We’ve just had our best Q1 for financial adviser sales on adviser platforms, so the message is getting through.
Moore – For me, what we’re talking about here is permanent capital. As a practitioner, that means that I am confident in being able to hold a completely index-agnostic portfolio, so that means all the way down to stocks with a market cap of £50 million. These are not the most liquid stocks in the UK stock market, but I am very happy to own them because unlike other funds, with an investment trust you can make an investment with the confidence that you’re going to be able to watch that investment grow. That fits really nicely in terms of how we can help the UK to flourish post-Brexit, because obviously one of the things we need to do as an industry is plant seeds and make sure that we get new saplings coming up, and certainly that’s something I can do.
O’Brien – That’s exactly it. Thomas is on the front line investing in those firms, planting the seed, but behind that you need financial institutions with balance sheets to provide the gearing so managers like Thomas can free up their investment pool. Again, back to this idea of cooperation in the market.
In terms of illiquid assets, the global market is seeing exponential growth. Most of it is in pure private equity buy-out plays, but more recently, we’ve seen the origination of loans and investment all the way down to credit cards. It’s really expanding the remit of the illiquid asset market – I’m talking about private debt, bank loan origination, and infrastructure. Of course, we won’t forget real estate, which is really exploding as well. Banks have probably left some of the space that private capital investors have come into, particularly in terms of loans/financing, and it’s all to be exploited by investment companies.
Brodie-Smith – What we’re seeing at the moment is a huge amount of demand for investment companies investing in alternative assets because of the strength of the structure for those type of vehicles. This year it’s already a record for fundraising from existing investment companies, and the top sectors for that sort of fundraising are renewable energy infrastructure, infrastructure, growth capital, and the property sectors. That really demonstrates that investors are valuing the closed-ended structure for these forms of illiquid assets. Obviously, the problems of the open-ended property funds have really shone a light on the suitability of the closed-ended structure where investors can buy and sell on the stock market and they don’t have to face those long and depressing suspensions.