Investment companies are projected to grow by nearly £49 billion in the next three years, with listed closed-end funds investing in alernative assets leading the way.
Investment companies are projected to grow by nearly £49 billion in the next three years, with listed closed-end funds investing in alernative assets continuing to lead the way, according to Fidante Capital.
Joachim Klement, head of investment research at the broker, said his forecast represented an annual growth rate of 11%, although it was unlikely to be evenly spread, with alternatives expected to maintain their dominance.
Although conventional equity funds accounted for 55% of the £171 billion of assets in the 400 London-listed investment companies at the end of last year, two-thirds of the money raised in the sector has gone to alternative investments, a wide category encompassing infrastructure, renewables, private equity, debt, property and hedge funds.
Klement told a conference of the Association of Investment Companies in London that part of the appeal of alternatives was they provide access ‘to areas that are normally inaccessible’ to retail investors.
‘They are investing in private market deals that are normally uninvestable,’ said Klement. ‘Alternatives allow [investors] to invest in uncorrelated assets...to either generate some income or obtain a smoother growth path for their portfolios.’
Klement said Brexit uncertainty was unlikely to dampen demand for alternative investments as investors seek stable income and capital returns.
How much growth depends on which of Klement’s three scenarios come to pass this year; all of which centre around Brexit outcomes.
His base case scenario assumed economic growth of 1.5% to 1.6% a year, with inflation falling to 2% in 2021, and the Bank of England increasing interest rates 0.25% in 2019 and 2020.
‘This is a scenario that essentially assumes a hard Brexit can be avoided and the UK enters an orderly transition phase during which a free trade agreement with the EU can be negotiated and agreed to,’ said Klement.
In this event, he predicted a 10% annual growth in assets for equity investment trusts and 14% for alternative trusts. He described this as ‘an ideal environment for private equity’.
An optimistic outlook for the UK, based on a soft Brexit that ‘leads to a stronger than anticipated increase in economic growth and a Bank of England that is willing to keep interest rates lower for longer in order not to stymie growth’.
In this case UK growth rises towards 2.2% in 2021, inflation stays at 2%, and interest rates remain around 1% for three years. In this scenario equity trusts enjoy growth of 12.1% a year but alternatives fly ahead at 21.5%.
For every optimistic scenario there is a pessimistic one of hard Brexit that ‘assumes an instant recession in 2019’ and a devaluation in sterling that sees inflation spike to 3.5%, just 1% real growth in 2020 and 1.5% in 2021, and the Bank cuts interest rates to 0.25% to ‘boost economic growth’ before hiking again in 2020 and 2021.
‘In this case we would still see some growth in assets under management - equities at 6.6% a year and alternatives I would expect 4% a year growth,’ said Klement.
Klement believed infrastructure and renewables would continue to be ‘favoured’ as part of a shift to specialist trusts. This is a trend that can be seen across all investment trusts, as investors shun ‘one-stop shops’ in favour of niche investments in both alternative assets and equities.
‘Look at the private equity space,’ said Klement. ‘The broader diversified private equity funds trade at a discount and have a problem growing their base and raising capital but specialist private equity funds trade at a very small discount or a premium and have much easier time raising capital.’
This trend shows a ‘bifurcation’ in the market where ‘the one-stop shop solution that people went to in the past is giving way to something else’.