Richard Davies, Managing Director at RD:IR, discusses the rise of investment company purchases via platforms
Richard Davies, Managing Director at RD:IR
If there is one thing that has characterised the change in buying patterns in the investment company sector this decade, it has been the rise of platforms as the way of purchase by retail investors. As a company that regularly analyses the ownership of over 200 investment companies, accounting for around 70% of the AIC membership by market capitalisation, we are in a prime position to detect trends in both who owns UK closed-end funds, and via which routes those investments are made. Our research, carried out over many years, shows that the proportion of investment company equity held via Direct to Consumer (“D2C”) platforms has doubled since the introduction of Retail Distribution Review (RDR).
The increasing importance of platforms for retail investors will be of little surprise to any investment company board or investment manager. Indeed, it may well be a source of frustration in terms of the perceived disintermediation of issuer and investor, especially in terms of voting, and a considerable challenge in terms of marketing. Life in the digital age is more complex than hitherto in many ways. What may be surprising, however, is that while the overall proportion of the investment company sector held by retail investors in terms of market capitalisation has stayed just about the same at 70% since RDR, the 9% rise in platform ownership has been outstripped by the 12% decline of retail investors holding in their own name on the share register. Our analysis of investment company share registers shows us that many retail investors have simply re-registered their shareholdings to the custodians used by the platforms or the wealth managers and private banks.
What is more difficult to discern is whether there is any new advisory situation in place for these investors or whether these changes represent merely a technical change of registration due to the costs attached to retaining a CREST membership. We know that historically many retail investors used advisory firms even when their shares were registered in their own name. We also recognise that a proportion of shareholders registered in nominee accounts which are linked to non-discretionary entities have always been either discretionary or adviser managed by third parties. However, these identification issues are small, relative to the overall market trend.
Our analysis shows that there has been a significant increase in the value held by private client brokers, wealth managers and private banks, which grew by 5% in aggregate. We assume that part of the decline in self-registered retail shareholders is to the benefit of the non-discretionary portion of the wealth managers’ holdings.
Of course, the market has not been static since RDR arrived. The AIC sector has more than doubled in value, from £75 billion at end 2012 to £178 billion at end 2018, reflecting both the arrival of new companies and the many new issues of shares for existing companies, as well as the growth of underlying assets. The alternative investment company market now accounts for around 40% of investment company market capitalisation, up from 35% at end 2012.
Non-retail ownership of investment companies on a proportional basis has remained static since RDR, partially supported by the take-up of shares in alternative investment companies by institutional investors, which have largely eschewed traditional investment companies since the noughties. Our research shows alternatives also display “institutional ownership decay” over time to the benefit of the retail investor (the average ownership is roughly half institutional, half retail).
From a marketing perspective, we need to understand better the drivers for investment company share purchases, and what is being bought on a self-directed, advisory or discretionary basis. The numbers would suggest that the greatest rise in investment style in this sense is self-directed, with execution being enacted via the retail platforms. The numbers would also suggest that the rise of platforms do not represent sizeable numbers of new investors but instead often the previous investors moving their shares around the share register but if we are to market the investment company world to new investors, then the data begs the question of how best to do this. Given the importance of platforms in the digital age in regard to investment company purchase, the platform lists have become key influencers of investment decision-making. One could argue that self-direction is a less than meaningful term when investment choices are being influenced so heavily by the construction of these lists.
Investment company marketing requires appropriate and relevant data in terms of ownership and buying patterns. Our understanding of the relationship between beneficial owners, custodians, platforms, advisers and fund managers is governed by the constraints of what is discernible from the share register and the information we can garner from shareholders on behalf of our investment company clients by strategic use of their powers under Companies Act Section 793. There are other sources of data on buying patterns, but these are often partial or misleading. The industry would benefit from greater transparency between share registration structures and related market players but without the incentive of payment or legal imperative to invoke change, it is difficult to imagine how things will improve in the short-term. We are mindful that the investment company industry is evolving in both the structure of ownership and investor route to purchase. We are looking this year to update our taxonomy of investor types, investment styles and market routes in our reporting for our investment company clients. We will first canvass opinion across the AIC membership to achieve the most popular categorisation taxonomy. While we may not be able to please everybody in the sector, I am sure we can find a working model that will provide useful insights to help boards and managers navigate the increasingly complex waters.
Richard Davies Managing Director, RD:IR T: 020 7492 0501 E: Richard.Davies@rdir.com