How many people work at the Financial Conduct Authority? About half of them! Yes, I know it’s an old joke but the truth is eternal.
Four weeks after I challenged the City regulator to explain why it has failed to require financial advisers to tell their clients about the advantages that investment trusts enjoy over unit trusts, the watchdog remains silent. Perhaps these bureaucrats think this looks like masterly inaction as they gaze down from their glass tower in Canary Wharf but I believe it looks more like gross indifference to investors’ best interests.
Over £1 trillion is invested in unit trusts – or six times as much as investment trusts – despite plenty of evidence that the latter often deliver higher returns with lower costs. So consumers are paying millions of pounds in excess fees every year while the watchdog slumbers on.
Fortunately, rising numbers of senior figures in the industry are wide awake to the problem. They have contacted Citywire to offer practical solutions to the marketing problems that get in the way of delivering better value to investors.
For example, many large intermediaries – including Britain’s biggest funds platform, Hargreaves Lansdown – say they cannot recommend closed-end funds because the surge in demand for a fixed supply of shares in investment trusts might distort prices to the disadvantage of clients. By contrast, unit trusts or open-ended investment companies (Oeics) can simply issue more units.
Now Daniel Godfrey – former director general of both the investment trust and unit trust trade bodies, the Association of Investment Companies (AIC) and the Investment Association – has got in touch to tell me how liquidity and marketing problems can be solved. He says investment trusts whose shares trade below net asset value, should buy back stock and stop 'holding shareholders captive through the discount'.
Godfrey explains: 'Trusts with liquid underlying portfolios can solve the problem by making a commitment to a ‘zero discount’ policy whereby they buy in shares at a small discount and issue new shares at a small premium. Among many virtues of this policy, it means that shares could always be available for dealing in size at a fair price.'
Hargreaves director Mark Dampier responded positively but not uncritically: 'Daniel is broadly right but, ironically, it makes funds far more open-ended and we already have something called unit trusts that do that! Getting in on a decent discount when the sector, style or fund manager is out of sorts is what folks like you and me love. Unit trusts have been subsidising investment trusts for years!'
Ian Sayers, chief executive of the AIC, points out that several investment trusts already follow this strategy. For example, Personal Assets (PNL), Capital Gearing (CGT), Jupiter Green (JGC), Martin Currie Global Portfolio (MNP) and Invesco Perpetual Select (IVPU) pursue a "zero discount" policy, although not all trusts have sufficiently liquid underlying assets to do so.
Sayers adds: 'However, we do not believe that "a one size fits all" strategy is appropriate for the industry. The closed-ended structure of an investment company allows managers to take a long-term view of their portfolio and has been a contributor to investment companies’ strong performance record over time.'
This is a complex problem but the right solution could dramatically improve the value consumers receive, boosting the battered reputation of the City and its somnolent regulators. So I have no intention of letting this sleeping watchdog lie and will continue to try to tickle its ribs.
For example, why do FCA staff never look out of the window in the morning? Because then they would have nothing to do in the afternoon!
Full disclosure: here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.