DIY InvestorMagazine
/
March2014
16
JAMES CARTHEW
HEADOFRESEARCH&DIRECTOR
MARTEN&CO.
READYFORTAKEOFF?
INVESTMENTCOMPANIES POSTTHERETAILDISTRIBUTIONREVIEW
With somany potential homes for your ISAwhy
should you be thinking about puttingmoney into an
investment company?
Investment companies have been around for a long
time – the oldest, Foreign & Colonial, was launched
in 1868. They had a reputation with some investors
as being old fashioned but, over the past decade, the
investment company sector has been transformed.
It is growing quite fast – new issues of investment
companies account for a substantial chunk of all new
listings on the London Stock Exchange.
Investment companies are, as the name suggests, real
companies that are set up for the purpose of making
investments. They have a board of directors whose job
it is to safeguard shareholders’ money.
They can borrowmoney and issue different classes of
shares and this canmake themmore complicated to
understand (though there are plenty of straightforward
ones). They invest in just about everything you can
So, faced with a choice of one type of investment that was
going to effectively bribe you to recommend it and one that
couldn’t, which one do you think got all the attention? The
FCA have changed all that though. Advisers now charge fees
regardless of what type of investment they recommend and
it is going to be harder for them to ignore the attractions
of investment companies, the chief of which seems to be
superior investment performance.
While there is always the exception to the rule, the average
investment company inmost investment areas tends to
outperform the average open-ended fund. Take European
funds for example. Over the ten years to the end of
December 2013 the average open-ended fund returned 138%
(according to the Investment Managers Association).
The average investment companymade 210% however
– that’s quite a big difference. Why should this happen
though?Well one important difference between open-ended
funds and investment companies is that shareholders get
to vote on how their company is run. Poorly performing
managers get sacked and funds with the wrong investment
strategy get wound up. This keeps directors andmanagers
on their toes (it is also part of the fun of investing in these
things – you even get the chance once a year to go along to
the annual general meeting and ask the people in charge of
your fund questions).
Investment companies can also take advantage of their
structure to enhance returns, borrowingmoney cheaply and
buying assets that go up can do wonders for performance.
It works both ways though and so definitely do not invest
in an investment company with a lot of borrowings without
considering how risky that makes it (but remember most
investment companies do not have high borrowings and
many have none at all).
Until this year all investment companies that only had a
quote on the AIMmarket were off limits for ISA savers. The
government have changed the rules however and now you
can choose frommanymore funds. The choice is not as
bewildering as for open-ended funds however.
If you want to learnmore, there are websites dedicated
to helping you. Ours,
gives free
information on every investment company quoted in London
plus news articles and in-depth research on selected funds
– drop by.
think of and range from highly diversified global funds
(ideal core holdings in an equity portfolio) to specialist
funds investing in biotech or renewable energy. In 2012
investment companies accounted for just 3.5% of all
stocks and shares ISAs. In 2013 that figure had crept up
to 3.8%. But we think this number ought to be about to
take off – why? The way that financial advisers get paid
has changed recently. Open-ended funds (unit trusts,
OEICs, UCITs) used to charge you big up-front fees and
then givemost of that back to your adviser. That option
was not available to investment companies.
