Lifting off

If nothing else, Seraphim Space Investment Trust is a gift to the financial pages’ headline writers. Its successful market flotation earlier this month prompted lots of talk of achieving take off and if it delivers on its promise, you can expect to hear all about rocketing returns and stellar performance.

However, to drag you back down to earth for a moment (apologies), this launch (apologies again) is important not just because it is the first opportunity most investors have had to benefit directly from the space industry’s growth. It also reminds us of the versatility and innovation that the investment companies sector enables.

In truth, no-one can be sure this fund will achieve its ambitious target returns of 20% a year over the longer term. There is certainly a good case to make for the investment potential of the space sector, where costs have tumbled at a remarkable pace in recent years thanks to advances in technology, and where demand is soaring for satellites that power everything from your television to the GPS navigation system in your car. Still, this is a new industry with plenty of scope for misadventure and disappointment.

But as an investor, what better way to explore space than through an investment company, given the sector’s long and happy history of trailblazing into new asset classes? From the railroad investment vehicles that got the sector started 150 years or so ago to today’s renewable energy funds, investment companies have repeatedly gone where others fear to tread.

That has been to the benefit of both investors and investees. Investors have secured access to potentially lucrative asset classes that would otherwise be the preserve of high-net-worth individuals and institutions; the way that private equity investment companies have democratised that sector is one good example. Investees, meanwhile, have been able to tap a broader range of investors for the funding they often need to grow; look at how investment companies are underwriting UK wind farms, for example.

It is the structure of an investment company that makes it the ideal way to pursue these new opportunities. These are asset classes that are often illiquid and volatile, which can be a dangerous combination for a fund that must fund its investors’ redemptions through asset sales. By contrast, the closed-ended nature of an investment company negates this problem; investors who want out can do so at any time simply by selling their shares on the open market.

It is no coincidence that investment companies pushing the frontiers in terms of investment mandate have been able to raise money in recent months when more mainstream vehicles have struggled. Another example is the Hipgnosis Songs Fund, which has just picked up £150m of new cash from investors; its remit is to buy up the back catalogues of leading artists, delivering returns through the royalties it earns on the intellectual property it acquires. The fund has been very successful but it is impossible to imagine it having started life outside the closed-ended structure.

This is not to suggest investment company fund-raisings only have a future when it comes to these more esoteric and experimental areas. It would be a great shame if more mainstream funds find it impossible to come to market. After all, in almost any sector you care to look at, investment companies have a track record of outperforming their open-ended equivalents.

Nevertheless, Seraphim Space reminds us that investment companies are good at something that no other part of the investment industry appears able to offer. Why shouldn’t all investors have access to the same broad range of asset classes open to wealthy individuals and large institutions? An investment company structure levels the playing field.