By Ian Fraser
Published: Financial Times
Date: 31 January 2011
The investment trust sector, eclipsed by the unit trust sector in the UK’s retail market, is due to receive a shot in the arm in two years when the UK government’s retail distribution review takes effect. However Carol Ferguson (pictured right), outgoing chairman of the Association of Investment Companies, the UK’s representative body for investment trusts and venture capital trusts, says it’s too early to crack open the champagne.
The RDR, an FSA-led programme intended to boost consumer confidence in the retail investment market, is due to be implemented in January 2013. By removing Ucits funds’ ability to pay commission to intermediaries, it is expected to level the playing-field between open-ended funds and investment trusts, removing legacy issues that have dogged the sector.
“We would hope that the RDR will enable us to become more mainstream in terms of competing with unit trusts,” said Ferguson, a former financial journalist and investment analyst who has been chairman of the body representing investment companies since December 2007.
Ferguson said that — even though investment trusts do have significant advantages including lower management fees — the RDR does not represent a panacea for investment trusts and warned that the difficulties surrounding the launch of new trusts could hamper sector growth.
Jackie Beard director of closed-end fund research at Morningstar, says: “Overall, we believe that the RDR will be positive for closed-end funds, although we don’t expect sentiment towards them to change overnight.”
Ferguson said: “Launching a new investment trust is quite difficult. I know Anthony Bolton has done that with his Fidelity China Special Situations trust, but the general perception is that if you launch an investment trust it goes to a discount which causes investors to wonder why they should buy shares at the launch, when you can pick them up more cheaply the day after. That’s not to say that investment trusts just won’t be launched but it’s not as easy to do it as it is for a unit trust.”
Ferguson, also a non-executive director of four investment trusts — Monks, Standard Life Smaller Companies, Invesco Asia and BlackRock Greater Europe — said the RDR is also likely to lead to a shakedown in the IFA market and possibly to the further dominance of larger IFAs and wealth managers whose models are already fee-based. She said the AIC continues to lobby the FSA and the Treasury over aspects of the RDR, including how the review will apply to wraps and platforms. Major players including Fidelity FundsNetwork, Cofunds and Skandia Investment Solutions intend to incorporate investment trusts, but the AIC is keen to persuade other wraps and platforms to follow suit.
The AIC has pulled off several tax-related coups during Ferguson’s three years as chairman. These have included persuading the Treasury to allow investment trusts to invest tax-efficiently in bonds and other interest-producing assets, a reform that took effect in October 2008. Progress has also been made in lobbying for an overhaul of section 842 of the UK’s Taxes Act — which governs the tax status of trusts. As part of the review, the government had proposed that the income that investment companies can retain should fall from 15% to 10%, thereby limiting their ability to build reserves to maintain dividends in lean years.
The Treasury has now agreed to allow investment companies to continue to retain 15% of earnings. “That was one battle we fought and won, following sensible discussions with the Treasury,” said Ferguson.
Ferguson said the AIC finds it far harder to fight its corner in Brussels than in London. “On the whole we find the Treasury and the FSA pretty understanding. Our difficulties really come more from Europe, where they do things differently.”
In its unadulterated form, the EU’s AIFM directive would have killed off the entire sector, so any watering down obtained by the AIC has been hugely welcomed by member firms. Despite strong support of ex-City minister Lord Myners, the AIC failed to secure an exemption for investment trusts. It has since focused on targeted revisions aimed at removing the worst of AIFM’s sting. “We have lobbied hard for a regime that will slightly increase costs, but which will allow the sector to continue to exist,” said Ferguson.
She said that some 70 AIFM-related issues are currently being negotiated by AIC executives Ian Sayers and Guy Rainbird, backed up by a team of 20 people in London. “All these points of detail have to be agreed by September this year.”
She said, whatever the outcome, the AIFM directive will increase costs for trusts, since each will be obliged to appoint an independent “depository”. “Depositories exist in Europe but they don’t really exist here so it’s a whole new business area which is going to have to be created.” Ferguson added she is delighted that the FSA or the Treasury have no intention of “gold plating” the AIFM directive. “A lot of what we did in the early days of this was to educate our counterparts in Europe about investment trusts, what their merits are, and so on. It’s through that process that we’ve been able to persuade them to come up with something less damaging.”
Ferguson said there is “no silver bullet” to the issue of managing the discounts between trusts’ net asset values and their share prices. However she said it is wrong to assume share buybacks are the answer. “They might temporarily reduce the discount, but they will also diminish the size of the trust.”
On allegations that investment trusts are a cozy sector, where boards are packed with the golfing buddies of the chairman, Ferguson insists that recruitment policies have evolved. “They are now much more rigorous and the use of headhunters is almost universal”.
She said the AIC charges membership fees of one basis point (0.01%) of member firms’ assets under management, and aims to keep fees at this level even in down-markets by building up reserves during more buoyant periods. She said she is proud to be handing over the institute in a well-funded state.
Ferguson said that key challenges for her successor, Sarah Bates, a former chief investment officer and head of investment trusts at Invesco, will be “the implementation of AIFM, MIFID and the RDR . Bates said: “During Carol’s time as chairman, she has worked hard during some challenging times, not least the progress of the AIFM directive, which is still awaiting conclusions… Carol has always had an admirable enthusiasm and commitment to the industry — which I hope to continue in my time as chairman.”