Consolidation will be one of the defining characteristics of the closed-ended fund industry in the future, according to Charlie Ricketts, the head of investment funds at Cenkos Securities.
Speaking at the Association of Investment Companies (AIC) directors’ conference today, Ricketts said there was a clear need for consolidation in the sector.
There are over 300 investment companies with a market capitalisation of less than £50m, Ricketts said, including 80 conventional investment funds. About half of these have market caps below £25m, and these small vehicles typically have higher total expense ratios (TERs) and lower turnover than larger cap funds, and often trade on higher discounts, according to figures Ricketts presented from Fundamental Data.
Small investment companies may also suffer because £100m is typically the qualifying market cap for buy lists. “There is a critical need for future consolidation,” Ricketts said.
He also highlighted the growing popularity of exchange-traded funds (ETFs), which are competing successfully with investment companies at several levels. “ETFs have competitive fees and can be traded on a market at net asset value. We should not underestimate the competitive threat from these funds,” Ricketts said.
Another key theme for investment companies will be diversification and the willingness to broaden their mandates. Ricketts suggested the issue of portfolio concentration has not been properly addressed. He gave the example of the equity income investment trust sector, which he said has remained unchanged for over a decade.
Factors such as the pending abolition of tax on foreign dividends and British banks cutting their dividends mean that equity income trusts should consider adopting a global remit, he added.
Meanwhile, Daniel Godfrey, the director general of the AIC, said liquidity, corporate governance and the burden of regulation would be significant concerns for investment company managers. “The threat of regulation increases in a downturn and in turn increases the AIC’s workload,” he said.
Godfrey said the AIC is looking at whether it has a role to play in opening credit lines for investment companies in a market environment where gearing is restricted.
He also pointed to growing opportunities for investment companies that are able to keep their costs and fees competitive. “The advantage of lower costs will become more important than it has been for 30 years,” he said.