Old friends return to the investment trust sector

It’s certainly not wrong to say institutional investors – including pension funds, wealth managers and family offices – have been less inclined to hold investment trust shares of late. Their explanations vary, ranging from concerns about the liquidity of some smaller funds to issues around cost and regulation. But the statistics have consistently flagged up this trend.

Now, though, Kepler detects a shift in mood. “This year we have noted some institutional investors adding to specialist equity trusts and to alternative assets trusts, both of which are arguably best accessed through the closed-ended structure,” analyst Thomas McMahon writes in a new note. “We also hear of pension funds and family offices researching, or adding to, alternatives and private equity trusts.”

To be clear, Kepler is talking about a trickle of interest rather than a flood of institutions returning to the sector. But there are good reasons to think the change of direction will continue – and perhaps even accelerate.

For example, new rules around cost disclosure paint investment trusts in a more positive light. Also, the government’s recent Mansion House reforms compel large investors to increase exposure to the asset classes where investment trusts excel. And many institutional investors are rethinking their approach to portfolio strategy and asset allocation.

More broadly, the appeal of investment trusts over other types of collective fund structures is as compelling as ever. Most obviously, investment trusts’ long-term investment record is one of consistent outperformance, courtesy of their ability to take on gearing but also, in many cases, thanks to stable management. 

A recent analysis from Interactive Investor, looking at the 27-year history of individual savings accounts (ISAs), found nine of the top ten sectors over that period were investment trust sectors, while only one sector was an open-ended fund sector. Moreover, 11 of the top 15 individual funds were investment trusts.

We know, of course, that past performance is no guide to the future. But all other things being equal, why wouldn’t institutional investors want exposure to a fund structure with this kind of track record?

All of which augurs well, argues Kepler, with institutions now poised to increase their exposure to investment trusts – and particularly those offering a way into real and alternative assets, where open-ended funds face structural barriers.

In the short term, the analyst thinks, the private equity and infrastructure sectors are likely to be the biggest beneficiary of this change of mood. It singles out HarbourVest Global Private Equity, Pantheon International and CT Private Equity Trust as contenders – as well as Molten Ventures in the Growth Capital sector. In infrastructure, the analyst points to funds including 3i Infrastructure, HICL Infrastructure and International Public Partnerships.

For advisers, this gives rise to an obvious question: should they follow institutional investors’ lead by raising client exposures to investment trusts? One option is to take another look at the trusts where increased institutional demand could provide a short-term fillip to the share price.

A more rounded and strategic view would be to embrace investment trusts more broadly, for the same reasons as the institutions are ultimately returning – their potential to deliver outsized long-term returns.