Numis: Trust sector shrank by £6.7bn in 2023

London-listed closed-end funds suffer a 'rare' year of outflows after share issues collapse in a bear market and investment companies return capital and buy back a record £4bn of stock.

High interest rates, the derating of growth, and faltering alternatives all took their toll on investment companies in 2023, with the lowest share issuance in two decades pushing the sector to suffer a rare 12 months of outflows.

Analysis by Deutsche Numis revealed the widening of discounts in the investment companies sector was unrelenting in 2023, as interest rate sentiment impacted both growth strategies and alterative income strategies, building on the deratings suffered by private equity and property in 2022.

Sector-specific concerns around cost disclosure and governance also weighed on sentiment, leaving much of the listed closed-end funds market out of favour, the broker said.


Numis said this was evidenced by a rare outflow – the first in a decade – which saw the sector shrink £6.73bn to £211bn.

Net assets in the sector’s 370 listed funds were higher at around £250bn, but in the bearish market their shares, excluding private equity giant 3i Group (III ), fell to an average 17% discount to asset value in October.

Although the average discount had since narrowed to 11%, better than the 12.5% it began last year, Numis said it was a long way off the 1% level at the end of 2021 before the growth sell-off intensified, and the 6.4% average of the past 10 years.

Numis analysts said the sector’s contraction was due to both low share issuance and large returns of capital to shareholders as listed funds bought back their depressed stock and paid attractive dividends where possible.

Share issuance over the year was limited, totalling just £1.23bn in 2023, the lowest level recorded since 2002.

The figure was 80% below the already muted 2022 figure, and down 92% from a peak of £15.6bn in 2021. Annual issuance has averaged £4.44bn over the past 10 years.

‘In particular, investors were wary about the impact of higher interest rates on valuations and the return outlook for many asset classes, especially infrastructure investment companies, which moved to significant discounts – drying up issuance,’ said Ewan Lovett-Turner, head of investment companies research at Deutsche Numis.

A few share issuers

Issuance was limited to just a few funds over the year as hardly any trust shares traded at a premium to net asset value (NAV), with 60% of the total issued by four investment companies.

Hedge fund BH Macro (BHMG ), run by Brevan Howard’s Alan Howard, was the biggest issuer at £315m, as it ‘rode on the back of strong performance in the difficult markets of 2022 and the ongoing uncertain market backdrop’.

However, Lovett-Turner said the shares in the £1.3bn fund have derated since the February 2023 issue, and now trade at a 13% discount after the merger of wealth managers Rathbones and Investec saw their large combined stake cut.

Global equity income portfolio JPMorgan Global Growth & Income (JGGI ), raised £173m, while 3i Infrastructure (3IN ) raised £102m, as the £2.9bn portfolio of energy transition, social infrastructure, and digitalisation companies took advantage of its comparatively high stock rating to replenish its credit facility. City of London (CTY ), the UK equity income trust and Janus Henderson flagship, rounded off the top four, raising £101m.

Dearth of IPOs

Initial public offerings (IPOs), or flotations, continued to be rare, following the drought of 2022, with just two companies coming to market and raising a total of £43m.

Former Gresham House portfolio manager Laurence Hulse launched a UK smaller companies trust in March after joining Dowgate Wealth. Onward Opportunities (ONWD ) listed on AIM in March, raising just £13m.

It was followed in April by Ashoka WhiteOak Emerging Markets (AWEM ), which was launched by the manager of Ashoka India Equity (AIE ). Founder of WhiteOak Capital Management, and manager of the trusts, Prashant Khemka hoped to raise £100m but had to settle for £31m.

Lovett-Turner said the addition of two trusts to the stock market marked ‘the second lowest number and value of IPOs this millennium’.

Record buybacks and returns of capital

Wide discounts suffered by investment trusts over the year – although they tightened from extremely wide levels in October as investors priced in rate cuts – stymied funds’ ability to grow. Instead, boards were focused on narrowing the discounts with widespread returns of capital to shareholders.

A ‘significant’ return of capital totalling £7.96bn was made over the year versus £4.4bn in 2022. Last year’s figure included a record £3.98bn of buybacks, the largest annual figure since Numis started collating information in 2000.

‘Buyback activity understandably picked up as discounts widened to levels not seen post-global financial crisis owing to economic uncertainty and rapidly rising interest rates,’ said Lovett Turner.

‘Equity funds accounted for the majority of buybacks – 85% of total – which makes sense given the liquid nature of the underlying portfolios, but buybacks from alternative investment companies picked up significantly during the year. This largely reflects that alternatives moving to a discount for the first time in their histories and some boards have stepped to try and manage the discount.’

The largest buyback came from Worldwide Healthcare (WWH ), which repurchased £253m of shares in a bid to protect its 6% discount, which was ‘tested during a challenging period for healthcare and biotech’, although Lovett-Turner noted the sector rallied in the fourth quarter on the prospect of rate cuts.

Healthcare peers also took opportunity of deratings to purchases shares, with Biotech Growth (BIOG ) buying back £46m of shares, RTW Biotech Opportunities (RTW ) purchasing £2m after the disposal of Prometheus Biosciences, while life sciences fund Syncona (SYNC ) launched a £40m buyback programme.

Scottish Mortgage slips

Scottish Mortgage (SMT ), the £10.5bn Baillie Gifford global equities portfolio, received a special mention as 2023 was ‘the first time in a number of years’ that it did not top the share purchase list. While it was the largest buyer of its own shares between 2020 and 2022 and the second-largest in 2019.

Lovett-Turner said ‘interestingly, this covers the period when the strategy was both in-vogue, and also issuing shares on a premium, and therefore not trading at particularly wide discounts, before then falling out of favour’.

The shares currently trade at a discount of 11% but have sat an average of 17% over the past year, as the growth-focused portfolio looks forward to interest rate cuts from the US Federal Reserve.  

Scottish Mortgage repurchased £107m of shares in 2023, mostly at the beginning of the year.

‘The company has faced numerous demands on its capital, as it seeks to manage the level of unquoted exposure and gearing, which naturally limits the ability to buyback in difficult conditions,’ said Lovett-Turner.

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