by Nick Britton
Nick Britton
What a week. As if the release of the sequel nobody wanted, Lockdown II, wasn’t enough to process, we’ve had a US election where the polls have been wrong (again), we’ve stayed up half the night without getting a result and the leader of the world’s biggest democracy has suggested that the counting of votes should stop while he is still ahead.
I’m not sure which is harder to comprehend – the US electoral system or the new lockdown rules. What happens if Trump and Biden win 269 votes each? Can I have a drink with a friend if we’re doing an outdoor activity, stand two metres apart and order online in advance? My head is spinning and I can offer no cogent analysis whatsoever on the big issues of the day.
But you didn’t come to Spotlight for that, did you? You came to hear about the lang cat’s latest paper for the AIC, Practically Speaking: Investment companies within centralised investment propositions.
Let’s start with the good news. It can be done! Scores of advice firms and DFMs run on-platform model portfolios with investment companies. Four advised platforms are “asset neutral” – that is, you face the same platform costs for open-ended funds and investment companies – and a further four are not far off.
There are even DFMs running model portfolios using investment companies for substantially all their equity exposure – a big shout out to Binary Capital and Crossing Point here. And Smith & Williamson also deserves an honourable mention for its long commitment to using investment companies across its models.
The bad news is: most don’t. Now, advisers have various reasons for shunning investment companies that we are quite familiar with – a lack of understanding, for example, or a feeling that they are too complicated or risky. DFMs don’t see things this way. But they still – by and large – don’t use investment companies in their models.
What the lang cat report lays bare is that the reason for DFMs’ reluctance to do this has a lot to do with platforms. All the DFMs the lang cat spoke to who run model portfolios in their own custody – that is, not on a platform – do use investment companies in their models. It is the platform that seems to be acting as the barrier.
This is not an attack on platforms – or on DFMs. It’s an attempt to analyse why people whose job it is to select the best possible funds are building portfolios exclusively out of open-ended funds when those same people may consider investment companies, in some cases, to be a better alternative.
True to its name, Practically Speaking does offer some practical advice for those assessing platforms, including ten questions to ask about the platforms’ capabilities and ability to handle investment companies in a seamless and cost-effective manner. There’s plenty more food for thought in the paper, so I’d encourage you to take a closer look.
One thing that has surprised many about the global pandemic is the efficiency of much of Asia in handling it, compared to Western countries. Having lived for three years in China it doesn’t surprise me quite so much – I’d say the reasons for it are cultural as much as political.
What I hadn’t realised though was how effectively Vietnam has controlled COVID. I did a double-take when I saw the numbers: 35 deaths for a little over 1,000 cases.
Of course under-reporting is always a possibility, but our investment company managers who are on the ground in Vietnam, or stay in close touch with the country, confirm that control of the pandemic has been staggeringly successful. We may have a lot to learn from countries like Vietnam – although rather like our attempt to import Chinese maths teachers to improve children’s numeracy, the jury is still out on how easily these lessons translate to a very different cultural context.
As Vietnam is probably top of my list of Asian countries I would like to visit but haven’t (I love the food in particular) I’m sorry the pandemic means I won’t be going there any time soon. I can, however, invest there thanks to three investment companies that focus exclusively on Vietnam. The views of their managers, and others with exposure to the country, are collated for you in this month’s Spotlight.
Finally, we’re taking a look at the dividend resilience of investment companies this year. COVID-19 has put revenue reserves to the ultimate test – and in the cases of Temple Bar and Edinburgh Investment Trust, boards have preferred to reset dividends to a more sustainable level rather than struggle to maintain increases.
Another option for those whose revenue reserves are running low is to dip into capital profits, but so far not many investment companies have gone for this approach that weren’t using it already. The use of capital profits to top up dividends has been a hot talking point in the investment company world since the rules were changed in 2012 to allow such distributions. We could see more investment companies going down this route in the near future, although at least one, Invesco Perpetual UK Smaller Companies, has shifted in the opposite direction. Kyle Caldwell examines the issues for us this month.
That’s it for now. I hope I have managed to distract you from the mail-in ballots for a bit. Best of luck surviving this second lockdown and we’ll be in touch again before Christmas.
Nick Britton, Head of Intermediary Communications, AIC