THERE was a bit of a hoo-ha this week after City watchdog the Financial Conduct Authority released its long-awaited report into the UK’s £7 trillion asset management industry.
Noting that fund management houses generally offer consumers little by way of price competition and no real means of gauging fund performance, the regulator set out a series of reforms designed to ensure investors’ rights are protected.
It is, said FCA chief executive Andrew Bailey, vital that any return investors make on their hard-earned cash is not eaten away by fund management fees.
“The asset management sector is important to the economy, managing the savings of millions of people and in the current low-interest environment it’s vital we help people earn a return on their savings,” he said. “We need a competitive sector, attracting investment into the United Kingdom which also works well for the people who rely on it for their financial wellbeing.”
For Ian Sayers, chief executive of the Association of Investment Companies (AIC), however, the report failed to recognise the part that could be played by the segment of the market his organisation represents: investment trusts, otherwise known as investment companies.
“The FCA’s report sees competition almost exclusively in terms of how open-ended funds compete with one another. It overlooks the potential for other funds, such as investment companies, to enhance competition,” he said.
This, he continued, is a mistake because “investment companies offer many of the features that the FCA sees as beneficial to enhancing competition, such as regular outperformance of benchmarks and independent oversight”.
Unlike the open-ended funds that much of the regulator’s ire was directed at, investment companies are traded on a stock exchange meaning, just like any other listed company, there is a limit to the number of shares they can issue.
As a result investors are doubly at the mercy of the markets because if the portfolio of companies put together by the fund manager does not perform well few people will want to invest in it, leading to its shares trading at a discount. Anyone wanting to sell out to take their chances elsewhere could well get back less money than they put in.
On the other hand, if the portfolio does well the fund’s shares will be in demand meaning they could well sell at a premium.
Such features have led to an impression that investment companies are complex beasts. However, the fact they have independent boards looking out for shareholders’ interests mean they also have a reputation as a cannier type of investment.
It should come as no surprise, then, that Scotland has been a leading player in the world of investment trusts for over a hundred years.
Among the big names are Alliance Trust, Dunedin Income & Growth, Scottish American and Scottish Investment Trust, all of which have been running since the 19th century. Others, such as the mammoth Scottish Mortgage and Monks, both of which are run by Edinburgh fund house Baillie Gifford, are newer, having launched in 1909 and 1929 respectively.
Whether they are any good or not rather depends on when you bought in and what price you got when you did, but Scottish Mortgage, for example, has been having a pretty good time of it of late.
The £5.3 billion trust, which confusingly enough, does not invest in mortgages but rather a range of global companies such as Amazon, Alibaba and Ferrari, has seen the net value of its portfolio grow by 236 per cent and share price by 302 per cent over the past 10 years. The market it sets out to beat, the FTSE All-World Index, grew by 149 per cent over the same period.
No wonder, then, that in the last year the trust’s shares were in such demand that they have traded at an average premium of just under two per cent.
Alliance Trust, on the other hand, has not had such a great time of it, failing to beat the returns of its benchmark, the MSCI All Country World Index, over one, five and 10 years to the end of 2016.
That could all be about to change, though, with the trust’s board completely overhauling the way it is managed following a campaign from activist investor Elliott Advisors.
And that, perhaps, is the true beauty of the investment trust structure – if shareholders are unhappy with the way it is being managed they have the power through annual votes to force through changes. That, and the fact that annual management fees tend to be lower than the 0.75 per cent levied by most open-ended funds.
Put like that, it seems that Sayers at the AIC may well have a point.
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