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Investment trust growth beat open-ended funds in 2017

17 January 2018

Investment trusts and investment companies enjoyed a bumper 2017, raising £11.9 billion from a mixture of record share issuance and a revival in flotations.

Investment trusts and investment companies enjoyed a bumper 2017, raising £11.9 billion from a mixture of record share issuance and a revival in flotations.

As a result the amount raised by the listed closed-end fund sector last year soared 75% from £6.8 billion in 2016, a year dominated by uncertainty over the EU referendum, according to analysis by Numis Securities. 

Even though a record £8.7 billion was handed back to investors in the form of share buybacks, tender offers and wind-ups, that still left a net £3.2 billion inflow into the sector, up from £2.76 billion in 2016, said Numis.  

This was helped by a pick-up in initial public offers (IPO) as companies set aside Brexit concerns with 22 funds listing on the stock market and raising £3.7 billion over the year. This compares to just six IPOs raising £811 million in 2016.

Over the past five years the issuance in the investment company sector has grown 13.7% a year, ahead of the 11.2% for open-ended funds, although the absolute growth in assets is still far smaller in the trust space at £83 million versus £490 million for funds.

Last year was particularly busy for property funds, with nine IPOs raising £1.45 billion – or 40% of the total raised. However, the biggest individual floatation was Sherborne Investors (SIGB). Activist investor Edward Bramson raised a £700 million war chest – his biggest to date – that will be put to work financing the purchase of companies that he believes are undervalued and ripe for a turnaround.

The second largest raise was BioPharma Credit (BPCR) at £606 million. The first loan made by the trust, which is backed by Invesco star manager Mark Barnett, was to US cancer drug specialist Tesaro.

It wasn’t all plain sailing in 2017, however, and although the pace of new issues was particularly strong in the third quarter, Numis analyst Charles Cade said there was ‘signs of indigestion in the final quarter’ with a number of IPOs pulled – which fund manager Harry Nimmo described as ‘market fatigue’. This included Greensphere Capital, a sustainable infrastructure investment company backed by venture capital veteran Jon Moulton, which pulled the plug on its float in December.

Despite the hiccup at the end of the year, the sector continues to go from strength to strength. According to the Association of Investment Companies, net assets in the industry sat at just £58 billion 20 years ago and have risen by 201% in that time to £175 billion.

This represents an increase of 5.7% a year, which Cade said was ‘respectable, given the capital value of the FTSE All Share has risen 2.8% a year over the same time period’.

While trust growth may have beaten funds over five years Cade noted that the investment companies sector had ‘largely missed out on the boom in retail saving that has seen the assets managed by UK unit trusts and open-ended investment companies (Oeics) increase from £160 billion to £1,194 billion’ – a rise of 10.6% a year over the past two decades.

Winners and losers

Although the IPO market was strong last year, not all of them will survive. There have been 126 IPOs since 2010 and 85%, or 105, have survived with their original mandate. Cade said most had ‘grown significantly’ and the funds have a total combined market cap of £37 billion, up 91% from the £19.3 billion originally raised at IPO.

‘This growth has come through a combination of asset growth and secondary share issuance,’ he said.

However, growth in a bull market is easy to come by and the picture is less rosy between 2000 and 2009. Of the 326 funds launched during this period, 227 no longer exist and another 25 have adopted a ‘realisation strategy’, while six have merged with another fund.

This means only 68 of investment companies launched over the decade survived.

‘Many of the funds disappearing were AIM or Euronext-traded funds in esoteric asset classes, often with poor corporate governance, high fees, over leveraged balance sheets – eg. property and private equity, and shareholder registers dominated by hedge funds,’ said Cade.

This poor track record could be one reason why trust investors are reluctant to buy into new issues. Cade said some ‘hardened cynics have a policy never to buy funds at net asset value (NAV) or above’ as history suggests closed-end funds are launched at the top of a cycle when the asset class is in favour.

‘As soon as performance deteriorates and the asset class falls out of favour, investors rush to sell and the discount widens sharply,’ he said. ‘However, more recent evidence suggests that buying new issues can be a profitable strategy.’

This profitability comes from a swathe of issues of alternative income trusts, here ‘the yield requirement imposes a discipline on fundraising, as too much cash drag would impact the ability to meet dividend targets’. These trusts have also remained in demand thanks to the low interest rate environment pushing income investors to new sources.

Cade said the majority of alternative asset trusts launched since 2010, 59%, are trading at a premium to NAV.

‘The target total return of most of the alternative income trusts is 7-10% per annum,’ he said. ‘46% of the funds have achieved a shareholder total return of at least 7% per annum since launch, while 63% have exceeded 5%.’

The best performing has been Syncona (SYNC), which focuses on science investments, delivering 16.7% a year – although Cade noted the bulk of the returns have come since December 2016 when the former Battle Against Cancer trust merged with the investment arm of the Wellcome Foundation.

A number of specialist property trusts have also performed well in share price terms, and Cade notes Romanian property investor Globalworth (GWI), which launched in 2013 and has returned 15.5% a year.

This is closely followed by Tritax Big Box (BBOX), which has been investing in logistics properties since 2013, and returned 15.2% a year.

Investment company news brought to you by Citywire Financial Publishers Limited.

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