David Prosser: The time has come for investment trusts

Outlook: For 25 years these vehicles have languished, neglected by retail and institutional investors alike in favour of the booming, open-ended fund sector. Now, a series of changes to the law is about to give them the chance to emerge from their sleepy little backwater.

The biggest problem for investment trusts has been persuading independent financial advisers to recommend them to clients. Though they invest in the same assets as their open-ended rivals, they have largely been shunned by advisers: not because of their structure, but because they do not pay sales commissions.

That edge is about to come to an end. Under the retail distribution review, the new rules governing financial advice due to be introduced in 2012, commission-based sales will no longer be allowed. And the biggest single reason for recommending open-ended funds rather than investment trusts will disappear. Investment trust chiefs plan a marketing drive to capitalise on this, with education programmes planned for advisers. They got a boost from a government reform announced this week, liberalising the tax treatment of their industry – and effectively allowing them to expand the range of assets in which they invest.

When Anthony Bolton, the stock picker long renowned for his stellar returns at Fidelity Special Situations, decided to return to frontline fund management this year, he did so through an investment trust. It raised hundreds of millions of pounds for investment in China and has done rather well in its first six months.

Still, Mr Bolton took a brave gamble. A year ago, when he would have been planning his new launch, the future looked bleak for investment trusts, which are a peculiarity of the British fund management industry. European regulators inadvertently snared them within the framework of their crackdown on alternative investment funds. That directive could have killed off the sector, and only skillful negotiation in Brussels saved it. Now, 12 months later, a different programme of reforms makes for a brighter future.