Us and them

3rd December 2012

RDR is fast approaching and with it the hope of a new dawn for the closed ended fund sector. The removal of adviser commission will 'level the playing field' with open ended funds, say many industry commentators. Over the years there have initiatives to encourage advisers to engage more with closed end funds. Most have failed. Despite lower fees and charges, the complexity of the structure and the additional time and effort required to understand discounts, gearing and liquidity have represented barriers to advisers. There is a common belief that these characteristics create extra layers of risk, often without tangible benefit. However, the key differentiator has been the growth of platforms and many platforms have offered limited access and availability to invest in closed ended funds.

The Association of Investment Companies (AIC), the industry body representing closed ended funds should be praised for its continuing efforts to educate advisers. It has also been lobbying platforms to provide wider access to their members’ funds. However, this is a gradual process and one that requires ongoing support from fund managers and their investment trust boards. Boards need to recognise that RDR will continue to change the attitude and requirements of their shareholders in demanding simpler structures, improved transparency and in some cases greater governance. That will mean more frequent communication with shareholders and greater retail fund management experience on the boards.

It seems that the closed ended versus open ended debate is growing in similar fashion to active versus passive management. The battle ground for both ‘us and them’ debates is long term performance and fund charges. Managers and analysts regularly publish data showing the outperformance of closed ended fund over ten year periods, with lower fees and the ability to benefit from gearing and discounts. Whether measuring returns in this way is a fair comparison is doubtful, particularly when open ended fund sectors are much larger and more diverse. The fee advantage has also been eroding with the availability of institutional charging on platforms and RDR will continue to drive down the price of open ended funds. Interestingly, active managers take long term performance to market their superiority whereas passive funds demonstrate their clear cost advantage.

The renaissance of closed ended funds will not come directly from advisers but from discretionary fund managers to whom they have outsourced their investment activity. To discretionary fund managers wanting to access as many asset classes as possible to achieve the best results for their clients, the debates on closed ended versus open ended, active versus passive are nonsense. They prefer to construct multi asset, multi manager portfolios using a range of fund structures side by side. An asset allocation decision is implemented by determining the best choice of either direct equity or bonds, open ended funds, closed end funds, structured products, derivatives or ETFs. So less talk of levelling playing fields! Discretionary managers are familiar with the sector and most importantly have the time and resources to dedicate to search for opportunities.