Managers should reach out to millennials to explain the benefits of long-term investing, says Alex Denny.
Pensions and investment trusts share a surprisingly long, but separate, history. The first National Pension Fund for Nurses was set up in 1887, a few years after the first investment trust, Foreign & Colonial, was launched in 1868.
Many of the earliest investment trusts continue today. While their investment objectives, portfolios and research processes have moved on significantly, their corporate structure and relationship with shareholders has survived 150 years with little change to the underlying idea of investors sharing costs and risks to achieve better investment returns.
Pensions, however, have moved on significantly - with very few (if any) of the original schemes surviving today in a recognisable form. While pension provision by employers in the state increased throughout much of the 20th century, it was only to be eroded again by the move from defined benefits to defined contributions, government cuts, lifetime and annual limits and punitive taxation on excess contributions.
Why should young people consider an investment trust?
The challenge with young people often isn’t about persuading them about the merits of investing in investment trusts, but persuading them about the merits of investing at all.
Many young professionals in their 20s or 30s find themselves heavily in debt. Student loans, mortgages and credit card debt mean that many live with liabilities that far exceed their assets.
Once those expensive debts have been paid down, however, there is a wealth of evidence that younger people aren’t putting enough of their income aside for their future needs. Reports suggest that a millennial would need to have the equivalent of at least £260,000 (rising to £445,000 for those who don’t own a property) at retirement to enjoy even a basic income thereafter.
Of course, whether in debt or not, with auto-enrolment into a pension scheme now mandatory, all young professionals find themselves with a pot of money, which is bound to build up as their employers contribute to it.
However, there is a wealth of academic evidence that (on average and over the longer term) investment trusts produce returns that outstrip bank interest rates, inflation, stock market indices and even other types of funds. Moreover, given millennials’ longer investment horizons, they stand to benefit from the excess returns investment trusts can make over many other investment types across economic cycles.
With an ever-growing need for people to save for their own futures, investing in a vehicle with such a long track record of success would seem an obvious choice for young people.
What are investors and the industry missing?
There have been unintended consequences of the shift from defined benefits to defined contributions. In the past, investment managers were employed to take risk-based asset allocation decisions that could lead to better longer-term investment returns. These defined benefits pension managers often turned to investment trusts to provide enhanced investment returns or diversification into illiquid asset classes.
Defined contributions pensions, by contrast, tend to focus much more on cost than value, and trustees of defined contributions schemes are limited in the range of options that they can provide. To the best of my knowledge, there are no defined contributions pensions in the UK offering access to investment trusts to members.
This is creating a market opportunity for those willing to take control of their own pensions. With little new money going into defined benefits schemes, and consolidation into so-called pension superfunds, which effectively prevents the pension manager from accessing all but the most liquid investment trusts, the shares once held within defined benefits schemes are now being sold.
This is creating liquidity and valuation anomalies for private investors looking to invest their own money for the longer term. The investment trust industry should welcome this opportunity and do its best to attract these self-directed investors, who deserve the same level of investment support as the defined benefits schemes of old.
Investment trust managers and boards should also engage with regulators, pension managers and trustees to highlight the long-term structural performance advantages of closed end funds, and encourage them to make them more readily accessible to those investors without the facilities to access them directly themselves.
Alex Denny is head of investment trusts at Fidelity.