Do-it-yourself investment platforms like AJ Bell, Hargreaves Lansdown and Interactive Investor have been caught blocking the purchase of investment trusts, at a time when the sector, and wider UK markets in general are battling to attract investors.
This, along with other problems for the industry, risks creating “another Woodford” if asset managers start to shy away from using them and towards less suitable investment vehicles, warned Jock Glover, strategic relationships director at Square Mile Consulting and Research.
The investment trust industry is already in a rough spot. Appetite in the sector has fallen to 12-year lows, and there are rumours some are considering moving to Switzerland to avoid UK cost disclosure rules.
Now, it has been revealed that trusts that invest in illiquid assets, such as Digital 9 Infrastructure and Chrysalis, have been blocked by the biggest direct-to-consumer platforms.
The trusts being affected are all alternative-focused trusts, meaning they invest in illiquid assets such as infrastructure and private companies.
European Union regulations used by the UK introduced ‘complex investment products’ which are seen as higher risk so private investors need to do a test to be able to invest in complex products on platforms.
While some investment trusts designate themselves as complex, platforms can independently decide to designate a trust as complex.
In addition, some have been blocked after they failed fair value assessments conducted by external consultant 360 Fund Insight, such as AJ Bell’s blocking the purchase of Bluefield Solar Income.
This is not the first time investment trusts have run up against legacy European rules, as they have been fighting a campaign against cost disclosure rules
“We have a small number of investment trusts blocked where we have been unable to get confidence that a product represents fair value for money,” said an Interactive Investor spokesperson, who would not disclose which trusts were being blocked.
Meanwhile, Hargreaves Lansdown has blocked a small number of investment trusts it deems not suitable for all retail investors, but added that they are able to take an online test to then buy the trusts.
AJ Bell said that it had not blocked the trading of trusts, despite claims online that customers had been unable to purchase trusts such as Chrysalis Investments.
“The assets in question can still be bought and sold, although purchases currently need to be made through our telephone dealing service (with the standard £5 dealing charge) rather than online,” an AJ Bell spokesperson said.
Customers have been outraged by this, arguing that it limits their financial freedom and risks worsening the already poorly performing trust sector.
“It’s sheer stupidity that I can buy a hopeless share at big risk of going bust like Superdry but can’t buy a pooled investment like Digital 9 Infrastructure without this farcical test,” said one customer on Stockopedia.
“Pointing out that I was a very experienced investor in investment trusts fell on deaf ears.”
Square Mile’s Glover said this blockage was one of the “unintended consequences of legislation where people don’t think through the full implications of it”.
While he understood the reason behind fair value rules, which aim to make sure the consumer is receiving value for their money, he argued that these moves by the platforms “feel a bit nannyish”.
If retail investors become unable to invest in the trusts, this could lead to asset managers packaging unlisted investments into “the wrong structure”, meaning “we’ll end up with another Woodford”, he added.
Neil Woodford is the disgraced former manager who saw his star fund collapse after it was revealed to have serious liquidity issues. This week, the Financial Conduct Authority took the first steps towards legal action against him.
Instead, investment trusts are the “perfect vehicle” for retail investors to access illiquid assets, as they allow investors to withdraw their money at any time, Glover explained.