Investment trusts saw record demand from private investors on advisory platforms last year, as these stock market-listed funds continued to grow in popularity.
There was £1.3bn of purchases of London-listed investment companies by financial advisers for clients, according to data compiled by ISS Financial Clarity for the Association of Investment Companies (AIC).
This was 23% higher than purchases of these closed-ended investment funds in 2020, which had been the previous record.
The most popular sectors in terms of the number of purchases were trusts with a global focus, with a 17% share of all buys, followed by flexible investment at 8%, infrastructure at 6%, UK equity income also at 6%, with global smaller companies and UK smaller companies both at 4%.
In terms of net buys, flexible investment was the top sector, followed by UK logistics property, infrastructure, global smaller companies, Asia Pacific and global.
Level playing field
However, there was an element of a rising tide lifting all boats, pointed out Laith Khalaf, head of investment analysis at AJ Bell, as 2021 saw big flows into investments generally as the market bounced back after vaccines proved successful, with open ended funds seeing the second-best year on record, with net inflows of £43.4bn.
“It is not surprising to see investment trusts and funds jump in popularity – after all 2021 was a great year for performance, particularly for equity funds,” said Emma Wall, head of investment analysis and research at Hargreaves Lansdown.
But, as Kyle Caldwell, collectives specialist at Interactive investor, says, investment trusts have been on the rise since the introduction of new rules for the UK financial services sector in 2013's Retail Distribution Review (RDR).
“Financial advisers have historically favoured open-ended funds, but have over the past decade been warming to investment trusts,” Caldwell said.
He said it is “no coincidence” that this change of heart came following the dramatic changes wrought by the RDR.
“Under the old rules financial advisers pocketed commission payments from the fund management company when they bought investment funds for their clients. In contrast, investment trusts did not pay commission, so were therefore less popular among advisers.
“The rule change levelled the playing field by abolishing commission payments for fund sales. As a result, investment trusts have experienced a rise in demand among advisers.”
While investment trusts had previously suffered from a perception that they are more complex and difficult to understand, with funds having been painted as more straightforward to get to grips with, the AIC has been working hard to address this injustice, with other numbers in the industry showing that many direct investors are becoming big fans of this type of fund.
Data from the Interactive Investor platform showed that customers aged 18-24 had a higher-than-average allocation to investment trusts, and that investors at the wealthier end of the scale also tended to have higher allocation to investment trusts than average.
Some of the key reasons why investment trusts are beloved of the young and the wealthy is their structure, including the ability to borrow to invest.
While this can work to the advantage of long-term investors and help to enable outperformance when markets are on the charge, it can also mean investment trusts might seem to be struggling more in a falling market.
“In times of volatility we can expect investment trusts to be more volatile than the same portfolio in an open-ended fund,” says Khalaf.
What's in style?
With growth and tech sectors delivering extreme outperformance in the past year, the popularity of well-known tech-focused trusts such as Scottish Mortgage Investment Trust PLC (LSE:SMT) last year has not been hard to explain.
However, this style rally has since reversed in 2022, and many growth funds have given back their 2021 gains.
“We have seen clients diversify the trusts they are buying as a result,” said Wall. “Growth options do still feature in the most popular, but alongside more value-orientated trusts, multi-asset options such as Personal Assets and those focused on thematic investment sectors such as climate, renewable energy and precious metals.”
While gearing can magnify more volatile times such as being experienced in recent weeks, Caldwell said, “for investors who hold their nerve and invest for the long term gearing tends to be more of a benefit than a hinderance”.
He said the popularity of the flexible investment sector, which houses several high quality trusts with a capital preservation and inflation-busting theme, along with the dividend heroes the frequent the global and UK equity income sectors, will mean “investors will be prizing more than ever in these inflationary times” and the clouds of lower growth looming, he said alternative assets “may well have to do more heavy lifting” in future.