Differentiating our offering

Wealth managers, on behalf of their clients, are among investment companies’ biggest and most sophisticated shareholders. They use investment companies for various purposes, giving them access to a wide range of strategies and asset classes.

A media webinar was held today by the Association of Investment Companies (AIC) to explore how wealth managers use investment companies, the benefits they feel they bring to their portfolios, and how they see the future of the investment company sector. 

The webinar featured Ben Conway, Head of Fund Management at Hawksmoor Fund Managers, Tomiko Evans, Managing Director and Chief Investment Officer at Crossing Point Investment Management, and Saftar Sarwar, Managing Director and Chief Investment Officer at Binary Capital Investment Management. Their thoughts have been compiled below with those of James Sullivan, Fund Manager and Head of Partnerships at Tyndall Investment Management.

Nick Britton, Head of Intermediary Communications at the Association of Investment Companies (AIC), said: “For wealth managers, investment companies offer a set of benefits that are hard or impossible to come by in the open-ended world. Their closed-ended structure enables them to access a wider universe of assets, while their strong performance, ability to use gearing and high governance standards are appreciated as well. Wealth managers can also add value by buying in at discounts.

“While some wealth managers running large model portfolios avoid investment companies due to liquidity concerns, it’s clear that many others do not have the same constraints. This enables them to differentiate their offering by drawing on a wider pool of investment opportunities, to the ultimate benefit of their end clients.”

How do you use investment companies, and why did you start using them?

Ben Conway, Head of Fund Management at Hawksmoor Fund Managers, said: “We run daily dealing multi-asset funds. As such, we need to offer our investors appropriate liquidity. We use investment companies as an efficient and appropriate way to access less liquid asset classes. We have always used them in this way as we believe they help broaden our opportunity set, enable us to run truly multi-asset portfolios and offer us effective diversification which improves our portfolios’ risk/return characteristics. The sector also offers discount opportunities providing another rich source of returns for investors, but these are used very selectively, and typically only where catalysts for corporate events such as continuation votes or commitments to return capital exist. Historically, our weighting to investment companies has ‘punched above its weight’ in terms of contribution to our funds’ performance.”

James Sullivan, Fund Manager and Head of Partnerships at Tyndall Investment Management, said: “Investment companies always form part of our thinking when composing a portfolio as we seek the most efficient way of exploiting a chosen theme or market. They often exhibit very strong governance characteristics, underpinned by the AIC code of conduct, which should not be taken for granted. Investment companies offer active management across the spectrum, from conventional index-like investing to quite granular thematic biases, offering investors like ourselves a full palette to paint from. I have been involved in the investment companies sector since the turn of the century, not only investing in them, but also working alongside Nick Greenwood as he launched what is now known as Miton Global Opportunities. Discounts or premiums to net asset value do form part of my thinking when entering or indeed exiting a position, but history shows that over the long term, much of that short-term noise comes out in the wash.”

Saftar Sarwar, Managing Director and Chief Investment Officer at Binary Capital Investment Management, said: “At Binary Capital we run a dedicated range of discretionary fund management (DFM) solutions: active, passive, sustainable and investment companies. In the investment company range, we have a variety of defensive and adventurous models that use only investment companies for their equity allocations.

“I have been a fan of investment companies for many years and am very familiar with them. I started my career at Baillie Gifford in Edinburgh and worked with investment companies from the beginning.”

What benefits do investment companies offer over other types of fund?

James Sullivan, Fund Manager and Head of Partnerships at Tyndall Investment Management, said: “The explosion of investment companies in less well trodden sectors such as renewable energy and alternative investments gives us greater scope when constructing a portfolio, permitting actively managed access to themes and sectors that were once unobtainable. With bond yields having been supressed for so long, and indeed now on the rise, never before has greater consideration been given to investments that do not exhibit the same level of volatility and risk as equity markets whilst avoiding fixed income. It really has been a fertile area for new issuance within the investment company community, furthering and expanding the offering to investors.”

Ben Conway, Head of Fund Management at Hawksmoor Fund Managers, said: “The structure offers us access to less liquid asset classes that could not (or should not) be accessed via daily dealing open-ended funds. Examples are manifold: property, private equity, private debt, asset-backed securities, ships, song royalties, illiquid listed equities, infrastructure. Having an independent board of directors that is beholden to shareholders’ interests above those of the investment manager is another advantage over open-ended equivalents. Investment companies that have income objectives are also advantaged due to their ability to hold back excess income in revenue reserves to smooth dividends during less fertile times such as last year.”

Tomiko Evans, Managing Director and Chief Investment Officer at Crossing Point Investment Management, said: “The investment company structure is suited to investing in asset classes such as private equity, infrastructure, biotechnology, healthcare, venture capital and technology. Many of the companies which investment companies invest in are not publicly traded, such as SpaceX, and would not be available for investment for an individual investor. Instead, investors can gain access to this diverse set of companies by investing in an investment company.

“The fact that investment companies are closed-ended means that they do not have to keep excess cash balances or sell assets to accommodate redemptions, unlike their open-ended counterparts. This allows them to invest fully and with the ability to add gearing which can aid long-term performance. Investment companies can therefore invest in longer-term projects such as infrastructure or property allowing further diversification and more varied income.

“Investment companies are often not only cheaper than their OEIC equivalents, but trade at values which can be different from the value of their underlying investments. This means that it is possible for investors to buy access to the underlying companies at a premium or a discount. Keeping an eye on valuations can help to provide further benefits to investors.

“Over the past year, one of the benefits of owning shares in an investment company has been particularly highlighted. This is their ability to retain income from one year to the next due to their legal structure, which has allowed them to continue to provide more consistent dividend income than open-ended funds.”

What is your outlook for the sector?

Saftar Sarwar, Managing Director and Chief Investment Officer at Binary Capital Investment Management, said: “It is very obvious that globally the best corporates are staying private for longer, no longer needing to list to get access to capital. Investment companies are well placed to take advantage of this trend. They have the ability to invest in the best private businesses and manage those investments in a long-term and efficient manner. Typical open-ended funds do not have the same advantage. I suspect more investment companies will be formed to take advantage of this trend and existing ones will increase their private investment allocations. I also believe poorly performing investment companies will be subject to more activism and management changes. Poor performance will not be tolerated. Boards will be more active.”

James Sullivan, Fund Manager and Head of Partnerships at Tyndall Investment Management, said: “I expect to continue to see investment companies tilt towards the alternative space, finding a niche where perhaps passive investments cannot reach so effectively. I also believe that with the onset of ESG, and the prevalence for this conversation on the G, investment company boards will increasingly display independence from the investment manager in pursuit of risk-adjusted performance that best satisfies the objective. Although no one would be an advocate of churning, a board exercising its right to put the role of the investment manager out to tender is to be applauded. We have seen evidence of this within some of the industry’s biggest names in the past 12 months, leading in the most part to a re-rating of the said investment companies.”

Ben Conway, Head of Fund Management at Hawksmoor Fund Managers, said: “This is a truly exciting environment for investment companies. The most liquid securities across bonds and equities are, in the main, extremely expensive. Investment companies can offer investors access to assets that are far cheaper. For example, for investors who want yield or natural income, liquid fixed income offers paltry yields. And yet there’s a whole host of less liquid assets that can be accessed via investment companies that not only offer high yields but are cheap relative to their own history too. This should encourage new investors to look at the investment companies sector, and result in discounts narrowing and premiums widening. That said, there are challenges and it is important that investment company boards do everything they can to ensure the shareholder experience is as good as it could be. Active shareholder engagement with boards has been an important feature post the pandemic to ensure discounts close. We have also seen M&A activity to increase the size and liquidity of trusts in order to enhance the appeal to a wider constituency of investors. We expect both themes to continue.”

Tomiko Evans, Managing Director and Chief Investment Officer at Crossing Point Investment Management, said: “Although there are many advantages to investing with investment companies, they are still not that widely used. This is partly due to lack of awareness and hurdles such as availability on platforms. Most platforms can now accommodate different investments within wrapper types, but not all, and as awareness increases and wealth managers continue to request the addition of investment trusts to the platforms, availability will grow. Hopefully there will also be pressure to reduce transaction costs which can vary greatly across platforms.

“ESG investing has grown at a tremendous rate over 2020 as the pandemic has brought into greater focus the need for sustainability. In the future we see the investment trust industry embracing ESG criteria to a greater degree and providing alternative and innovative routes to ESG investing beyond those offered by open-ended funds.”

-ENDS-

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Notes to editors

1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 360 members and the industry has total assets of approximately £249 billion.
2. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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