My working assumption has always been that when you pick a wealth adviser they bespoke a portfolio for you and look at the whole of the market, without sensible exception. And that last term sensible exception is important. By rights, they should look at any fund or vehicle that can be easily accessed in the market.
Let’s contrast that with the rumors I’ve been hearing about the minimum threshold applied by leading wealth advisers for an investment trust size. I’ve now heard from three different, well connected inside sources that the large wealth houses – and we all know who I mean – have in effect increased the minimum market cap from £100m to £400/£450m in the last year or so. The driver is obvious – consolidation. As these houses start to accumulate huge sums of money, the minimum liquidity level for their buy lists is dragged higher. If an investment committee decides to include say a small, alternative fund in their list they might insist that there is enough liquidity for say a 0.5% exposure for the £40 billion book. That could result in a couple of hundred million pounds flooding into a fund. Clearly, that will move the market and the buyer not be able to buy enough stock.
That’s the justification. The downside is, I think, equally obvious. First off, in effect, the big wealth houses are betting pretty much exclusively on the big asset managers, who possess enough in-house distribution to get to the first couple of hundred of million. Yet again we see market concentration into an oligopolistic elite. On a side note, this elite bunch of asset managers are also probably going to end up paying their already well-paid managers even more because of the concentration effect.
I’m sure the FCA will be delighted with this idea of channeling yet more money to bigger, systemically important managers – they’ll probably think they represent less risk and can be more easily supervised – but I’m not sure this is a great idea for the rest of us. The investment trust market is largely the preserve of intelligent, individualistic wealth managers who can properly fund pick and smarter private investors plus a smattering of much bigger institutions. The higher threshold will make smaller, more niche strategies less viable and will also encourage first-time fund issues to go for very large initial capital floats – arguably too large for what are frequently niche asset classes. Regardless of this last point, we’re likely to see niche categories suffering as they struggle to raise money as they struggle to justify why they should have hundreds of millions of pounds allocated to them.
I also think that this use of a minimum threshold is not good news for ordinary investors like you and me. We expect our managers to be able to access the whole of the market, to be agile and to be able to make intelligent bespoke decisions. High bars stop that. As I have already mentioned they encourage behavioral traits which switch flows into the most liquid categories.
I also happen to think this will limit choice and represent a potential death blow for the whole investment trust industry. Care to guess which structure can continue to make money with say £100m or £200m? The answer is the ETF sector, especially active ETFs. If I were a pushy, young boutique looking to build exposure on the public markets with permanent capital I might start to seriously consider an active ETF structure, probably with white label manufacturers such as HanETF or LGIM. Most ETF insiders reckon that you just about make money at £100m and once one gets above that level, margins should start to grow. Why choose an investment trust if you can switch to an ETF? Investors like the independent board structure of investment trusts – a fantastic plus – but if I were said thrusting, young boutique manager in say an alternative asset class, I’m not sure I would care that much.
So, if these rumors are true – and I have every reason to believe they are – it’s a dark day for the investment trust sector. One of the jewels in the crown of London finance is being threatened by its own best customers.