You can’t exactly accuse Annabel Brodie-Smith of letting the grass grow beneath her feet. Minutes after addressing yesterday’s IFA Magazine conference in London on EIS and VCT investments, she was dashing for a Heathrow taxi so as to make her afternoon’s appointment in Edinburgh. It’s that kind of energy that our seminar delegates admire.
That, and the fact that Ms Brodie-Smith is peerless when it comes to explaining the particular advantages of the investment trust sector. As she was able to confirm yesterday, yet again, closed-ended funds have once again shown a clean pair of heels to the open-ended oeic sector this year, and the long-term outperformance is pretty conclusive.
But it’s still an educational process task getting advisers to understand the closed-ended sector clearly. Two years after RDR, yesterday’s show of hands in the room confirmed that there are still many advisers who still think of ITs (or investment companies, as we’re now supposed to call them) as unnecessarily risky because of the additional price pressures that result from their closed-ended structures. And that’s an impression that Ms Brodie-Smith is keen to dispel.
No Fear of Redemptions
Yes, she told the delegates, it’s undeniable that being closed-ended means you get the full distorting effect of selling or buying pressures, depending on whether your companies happen to be in favour or not. Investment companies are just listed companies like any other. Whereas an oeic manager doesn’t have that pressure.
An investment company manager also doesn’t need to offload shares at short notice to meet redemptions like his oeic counterpart. And actually that’s a strength, not a weakness. Not only does it keep costs down. There’s also the fact that oeics have to maintain a cash buffer for handling redemptions, which means that not all their capital is actively deployed. Whereas an IT manager has access to the whole lot if he wants it.
Dividend Smoothing
But an equally important aspect of investment company life, she told the delegates, is that the managers are allowed to retain up to 20% of their profits for future distribution – whereas an oiec, by comparison, is required to distribute everything right away. Being able to hold back some cash for a lean year is an important advantage when it comes to smoothing the investors’ progress. And that in turn helps to make investors less jumpy, and less likely to jump ship and create unnecessary volatility.
Given enough time, Ms Brodie-Smith would have gone on to tell us how the closed-ended structure can actually be the key to investing in tight and illiquid markets (such as emerging markets), where there’s no prospect of being forced to sell at short notice because of redemption demand. But that was for another day. Annabel was off through the door. Scotland, here we come…..
