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What’s in store for investment trusts in 2015?

The investment company sector ends the year in rude health, after a record-breaking 12 months

Annabel Brodie Smith Peach

The end of the year is always a good time to take stock, so how was it for the investment company sector? There have been some mouth-watering returns in some areas, particularly from some of the specialist sectors but, generally, it appears to have been a solid year of “steady as she goes” performance. 

The sector is up 6 per cent on average year-to-date; not quite the spectacular returns of 2013 but good nonetheless considering markets experienced volatility in the last quarter.

What is important to note is that it has been a record-breaking year for the industry, with some significant milestones reached.

For example, the investment company sector broke a record at the start of 2014, when we reported the average discount had reached 3.3 per cent, the lowest since records began in the 1970s.

Of course, some commentators at the time predicted that tight discounts could be used as a converse market indicator. Analysts at JPMorgan Cazenove, while acknowledging discounts and markets can be correlated, actually looked into whether a period of narrowing discounts is followed by a market fall.

It concluded this was not always the case, as in 1994-1997 when discounts fell as markets rose. Discounts actually widened post-2005, well before the credit bubble burst, though they widened even more rapidly when markets did fall.

With this in mind, it is very interesting that, despite some market volatility in the last quarter, the average discount was 3.2 per cent at 31 October – another record low. 

Another record the sector has broken this year relates to assets under management.

It was only in January 2013 we reported assets under management had broken the £100bn barrier for the first time. By January this year that had increased to £109bn and, by the end of October, sat at an all-time high of £119bn. This means industry assets have increased by £10bn in less than a year, which demonstrates the growth of the sector.

Income continues to be a strong theme in the investment company sector. Alongside strong markets, this has contributed to historically tight average discounts, with many of the income-focused companies trading close to par or at a premium. 

Income has also dominated much of the fundraising activity and we are continuing to see this. Fundraising continues to be healthy, with some £2.4bn raised so far by new launches, compared to £2.6bn for the whole of last year. 

In keeping with the trend of recent years, new issues have tended to be in alternative assets and many of these have an income theme. The average yield for those new issues generating a dividend is 4.9 per cent. They are using the flexibility of a closed-ended structure to invest in higher yielding, illiquid assets. Investment companies lend themselves to illiquid assets because managers do not have to sell stock to meet redemptions. 

New issues have tended to be in the Debt, Infrastructure: Renewable Energy and Property sectors. We have also seen launches in a number of other sectors, including Leasing, Commodities and Natural Resources, Europe and Global Emerging Markets.

The largest UK-domiciled launches were P2P Global Investors, which raised £200m, and the high profile Fundsmith Emerging Equities, which raised £193m.  The largest new issue was the Jersey-domiciled Kennedy Wilson Europe Real Estate, which raised £910m, making it the fourth largest new issue of the last decade. 

So, what about performance year-to-date? India appears to be the star performer of 2014. Indeed, the top three performing investment companies across the entire spectrum (excluding VCTs) have been India Capital Growth (up 48 per cent) New India (up 47 per cent) and JPMorgan Indian (up 45 per cent). 

Meanwhile, Biotechnology and Healthcare is the top-performing sector, continuing its strong performance of recent years (up 30 per cent over the year). Property Direct: UK, Property Direct: Asia Pacific and Infrastructure have also performed well. 

When it comes to sector performance, the year has been a good one for the specialist sectors, although it is interesting to see two companies from the Global sector – Scottish Mortgage and Caledonia – are among the top 20 best performers. 

VCTs have also performed impressively. In fact, if you look at the whole investment company sector including VCTs, seven of the top 10 have been VCTs. Elderstreet VCT, in the generalist sector, is the top-performing VCT overall, up 57 per cent, followed by New Century Aim VCT 2, which is in the VCT AIM Quoted sector.

Another key theme this year, in keeping with 2013, has been an increasing tendency of investment company boards to reduce their charges, either by cutting or abolishing performance fees, lowering charges more generally, or a combination of the two. Indeed, some 10 per cent of the sector has made changes to their charges this year to benefit shareholders. 

Fee changes have been taking place particularly in the retail-orientated sectors, which are looking to compete with open-ended funds in a post-RDR world.

We can clearly see RDR is having an impact on the industry, with adviser and wealth manager purchases of investment companies increasing each quarter. Matrix Solutions Financial Clarity has demonstrated that adviser and wealth manager purchases have more than doubled on platforms in the 12 months to the end of June, in comparison to the same period prior to RDR. 

Given the demand for income and the increasing likelihood of interest rates staying low for longer, it is likely income will remain on the agenda next year. This will continue to influence new issues as well as issue activity more generally. This year saw a number of investment companies from the income sectors issue shares in the secondary market to meet demand and this is likely to continue.

The forthcoming pension changes present a great opportunity for the sector as well. As part of a balanced strategy, investment companies can be used to build a long-term pension portfolio, delivering a higher or growing income in retirement. We have already seen one investment company, British Assets, announce its intention (subject to shareholder approval) to change its management to BlackRock and adopt a multi-asset income mandate. This was the sector’s first response to the opportunities the pension freedoms will create. It seems likely other investment companies will follow suit.

Fees will also remain on board agendas, as investment companies seek to remain competitive in a post-RDR world. The RDR will continue to be an important influence not only on adviser and wealth manager purchases but also on direct purchases, which have grown considerably over the last five years.

The investment company sector ends 2014 in rude health, after a record-breaking 12 months. Here’s to a Merry Christmas and a Happy New Year.

Annabel Brodie-Smith is communications director at the Association of Investment Companies 



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