Follow the money?

Critics of the investment companies sector often complain that it is generally too small to provide the liquidity that wealth managers need. Larger firms can’t buy funds without moving the price against themselves, the complaint goes.

Well, tell that to the wealth managers who responded to a survey just published by Research in Finance; many of them appear to be champing at the bit to embrace investment companies.

Overall, a quarter of discretionary fund managers plan to increase their exposure to investment companies over the next six months, Research in Finance says. In fact, many of these firms have already significantly increased their allocations to the sector, the research also reveals.

These firms are quite clear about why they’re investing. They’re attracted to features that are unique to investment companies, such as their ability to take on gearing and to offer exposure to specialist asset classes. And they see the unusually wide discounts at which shares in many funds currently trade relative to the value of their assets as offering a window of opportunity.

Some sectors are clearly more in demand than others. Infrastructure and private equity top the buy lists of wealth managers. These are two areas of the market that other types of collective investment funds struggle to access. They also both feature a number of funds sitting on particularly wide discounts.

However, it would be a mistake to assume that wealth managers are only interested in investment companies as a route into niche assets. Around a fifth have plans to invest in funds offering exposure to global equities; almost as many are looking forward to investing in UK equity-focused investment companies.

These are fascinating findings. It’s certainly the case that investment company discounts have risen sharply. Shares in the average fund currently trade on a 15% discount to the value of its assets, according to AIC data. This has been a problem all year, but largely reflects depressed investor sentiment rather than any kind of systemic issue; indeed, in recent times, the trend has been for funds to trade on much narrower discounts than in the past.

Wealth managers appear to be taking the view that it is a matter of when, rather than if, discounts start to come back in. Getting the timing right on such calls is always difficult, but there is reason to be hopeful. It’s worth noting, for example, that discounts on some funds in the private equity sector of the investment company universe, which were particularly wide, have narrowed sharply in recent months.

Naturally, it's possible that these firms are making the wrong call – or at least moving prematurely to increase their investment company exposure. However, the fact that so many wealth managers are scouring the sector for discount opportunities rather undermines the argument that it is too illiquid for them.

There will be some smaller funds that genuinely are off-limits to certain firms, particularly the larger wealth managers. For the most part, however, the sector remains accessible – and Research in Finance’s study suggests many firms now smell a bargain.