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Kira Nickerson Investment Matters
Investment trusts (and companies) are experiencing something of a renaissance, with a number of new listings and share issuance over recent weeks. Discounts on trusts have narrowed significantly over the year, and with the market rally are showing strong performance, creating buying demand.
Closed-ended investment vehicles have been an overlooked area for many UK advisers, who are often criticised for not looking at these collectives due to their lack of commission.
While certainly that has been a historical issue concerning the popularity of the products, more recently, investors have been wary because of exaggerated falls they suffered resulting from their gearing. However, since the market rally began in March, that same gearing has worked in the favour of the closed-ended fund market and performance has soared.
According to figures from Trustnet, just 82 investment companies out of a universe of 593 have negative returns over the six months to October 15. The majority of those showing losses are VCTs.
The positive returns shows how far some of these companies have risen since March, with the top performer, T2 income, gaining more than 550 per cent over the six-month period. It is not alone in achieving triple-digit gains. Across the universe of investment companies on Trustnet, 30 have returned 100 per cent or more. This compares with the open-ended fund universe, where there is only one fund out of more than 2,700 which made gains of more than 100 per cent over the past six months - Close special situations.
The Association of Investment Companies notes the increased demand for these investments resulting from changing market sentiment has led to a significant reduction in discount levels.
At the end of 2008, the average discount on investment companies across all sectors was 17 per cent and as of the end of September, this stood at 12 per cent. Some sectors have benefited more than others.
Alternative asset classes, which are well represented in the closed-ended world, have shown some of the strongest narrowing of discount levels. The once unpopular property sector has moved from an average discount of 44 per cent as of the end of 2008 to just 6.5 per cent as of the end of September. Private equity trusts have gone from an average discount level of 51 per cent to 38 per cent while listed hedge fund vehicles have moved in from 26 per cent to 12 per cent.
Issues from investment companies have also increased in this more buoyant investing environment. According to the AIC, there have been 57 issues from its members, three of which have been new launches. Earlier this year, BlackRock launched a listed hedge fund of funds, BlackRock absolute return strategies, while Impax is currently in an offer period for its Asian environmental markets plc, with launch set for October 23. Impax is hoping to raise between £50m and £200m for the trust and as of October 15 said it had already exceeded the low end of its target. At launch, the trust is likely to be more than £100m in size.
Asian environmental markets will feature 45-50 positions spread across the Asia Pacific region. The trust is looking to take advantage of the growing environmental theme in Asia emphasised by the amount of money earmarked in the recent stimulus packages for areas such as infrastructure, energy and resources.
The universe of companies in Asia that qualify for the trust is expanding dramatically and the Impax team can currently draw from 340 companies with a combined market cap of more than $650bn.
Many of the trust’s investible companies are those it classifies as “in transition”, says Impax managing director of listed equities and co-fund manager Bruce Jenkyn-Jones. Well established companies in sectors such as construction, glass and electronics are migrating their businesses towards more environmental products and as such are well placed to benefit from re-ratings and increased earnings. For example, he cites China’s glass company Xinyi, which has been refocusing on solar business and supplying specialised glass for high-efficiency office buildings. The stock is good value as well, he adds, pointing out it has a market cap of $1.2bn and is on a p/e of under 10 times 2010 earnings.
Drivers benefiting companies with an environmental focus in Asia include the strong Asian policy in response to growing issues, such as the need for substituting imported oil and gas, encouraging clean power generation, the reduction of air and water pollution and extracting value from waste.
While the Impax trust is highly specialised, it appears to be garnering a lot of attention. Jenkyn-Jones says the trust has received support from a mix of investors, including pension funds and private clients.
He says Impax, which does have an open-ended fund in its stable, chose to launch the Asian fund via a listed structure as it felt it had a strong franchise in that community. The group’s good relationship with its broker and its knowledge of the shareholders in its existing trust, environmental markets, also pushed Impax down this route.
Jenkyn-Jones says the managers chose to keep the trust structure as simple as possible and the fund does not have a performance fee and no structural gearing will be used.
Another popular feature of the trust has been its issue of subscription shares, a notable trend across the closed-ended funds market. Jenkyn-Jones says subscription shares were added because of requests from investors.
AIC director of communications Annabel Brodie-Smith says subscription shares, which act like warrants, have been increasingly popular.
At a time when raising capital for existing funds has been a struggle, companies have had few options beyond bank loans - convert to a split and issue zeros or offer subscription shares. The latter gives investors the right, but not the obligation, to buy into the trust at a set price and time.
Among the trusts adding subscription shares in recent months are Aberdeen new Thai, Blackrock’s Throgmorton trust, Finsbury world-wide pharmaceutical and Invesco Asia.
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