Queen’s Platinum Jubilee

As the UK prepares to celebrate Queen Elizabeth’s Platinum Jubilee over the June bank holiday, the Association of Investment Companies (AIC) has collated comments from long-serving board directors, managers and analysts to explain the reasons for investment companies’ continuing success. These experts also describe how the investment company industry has changed and recollect the most challenging times of their career.

Research from the AIC demonstrates that 35 investment companies with current aggregate assets of £55 billion were in existence at the time of the Queen’s accession to the throne some 70 years ago (see table below for launch dates and performance data).

Why do investment companies continue to be successful?

Hamish Buchan, AIC Chair from 2005 to 2007, former Analyst at Wood Mackenzie and former chair and director of nine investment companies, said: “The investment company sector is a constantly evolving and changing sector which represents healthy capitalism at work. In comparison to the open-ended sector the investment company industry is self-cleansing. If something goes wrong in an open-ended fund there’s nothing investors can do and it just shrinks in size. But with an investment company there’s always something that the board or shareholders can do whether it’s a merger, wind-up or change of strategy.

“I like to think of the investment company sector as a bath – the water’s coming in through the taps and that’s the IPOs and secondary fundraising. Then there’s water swirling around the bath and that’s what’s going on in the industry - the investment activity and then there’s the water running out of the bath - the buybacks and wind-ups. There’s always something going on in this industry and that’s what makes it successful and fascinating.”

Gill Nott, Chair of US Solar Fund, Chair of Premier Miton Global Renewables Trust and Chair of Gresham House Renewable Energy VCT 1 said: “Investment trusts have continued to be successful because they have the advantage that they can weather financial storms better than open-ended funds. When stocks fall and investor sentiment turns against a trust, the fact that the trust can trade at a discount, and not face a downward spiral of withdrawals, gating or even wind-up, means that it can live for another day. Thus it can potentially deliver value to those who stick with it when markets bounce back.”

Max Ward, Manager and Director of Independent Investment Trust and Manager of Scottish Mortgage Investment Trust from 1989 to 2000, said: “The virtues of closed-ended investment vehicles become ever more apparent as volatility increases and liquidity diminishes, but perhaps the most important point is that they represent excellent value for money – even before you take into account the added bonus of discounts!”

James de Sausmarez, Director and Head of Investment Trusts at Janus Henderson Investors, said: “If you look at the traditional equity-focused investment trusts, success is about doing what it says on the tin consistently through all the ups and downs of global markets and global events. The AIC’s dividend heroes, led by The City of London Investment Trust, have increased the annual dividend through all major crises of the last 55 years – the three-day week, the 1974 crash, the winter of discontent, the 1987 crash, the Asian financial crisis, the dot-com boom and bust, the financial crisis and more recently Brexit, the global pandemic and the Russian invasion of Ukraine. This long-term consistency coupled with good capital growth is the reason the investment company industry is over 150 years old and will continue to look after the wealth of many private investors for many generations to come.”

Jeremy Tigue, Senior Independent Director of abrdn Equity Income, Senior Independent Director of Monks and Manager of F&C Investment Trust from 1997 to 2014, said: “The investment company industry is adaptable, and can issue new launches to respond to new markets and asset classes, whilst existing companies can adapt and change to meet investors’ needs. The rapid evolution of the infrastructure sector is a great recent example.”

Charles Cade, Director of Temple Bar and Head of Investment Company Research at Numis from 2008 to 2019, said: “The key strength of the investment company sector has been its ability to adapt and evolve to reflect changes in the nature of investors and the competition from low-cost trackers. The sector has a number of key advantages, including the security of dividends due to the ability to use revenue reserves, and access to less liquid asset classes, including alternative income, that are unsuited to funds with regular redemptions. The ability to take a long-term approach gives investment companies the potential to deliver strong performance over the market cycle without the threat of suffering redemptions at times when the manager’s investment approach is out of favour which is another advantage of investment companies.”

How have you seen the investment company industry change?

Gill Nott, Chair of US Solar Fund, Chair of Premier Miton Global Renewables Trust and Chair of Gresham House Renewable Energy VCT 1, said: “In the past 25 years there has been a dramatic change in the board membership of investment trusts. In the past, the majority of directors were male and from a financial services background. Now we are on the way to having an equal number of women, often younger than their male counterparts and from very diverse backgrounds. This has brought new thinking to the boards, particularly around communication with shareholders, and has helped investment trusts remain a structure of choice.”

Hamish Buchan, AIC Chair from 2005 to 2007, former Analyst at Wood Mackenzie and former chair and director of nine investment companies, said: “The growth of alternatives has really changed the face of the investment trust sector. Without doubt this has greatly increased the size of the sector and its appeal. Alternatives offer a service to private investors and wealth managers, who can’t invest in those assets themselves, whether it’s infrastructure or renewable energy companies for example.

“In the 1970s, investment trust investors had to tolerate a fluctuating capital gains tax regime and the complications of exchange controls and the dollar premium. The abolition of all this under Mrs Thatcher led the way for a much more attractive tax and investing environment for investment companies. The late 1970s saw pension funds begin to bid for investment trusts to increase the value of their holdings in them. Pension funds and institutional investors also began to develop their own research departments and no longer needed to hold investment trusts as they could buy individual shares. This led to the start of the transition of ownership of investment trusts from institutions to private investors and wealth managers. Bringing the industry back to its purpose when it was launched in 1868 – to give the ‘investor of moderate means’ the same benefits as professional investors.”

Charles Cade, Director of Temple Bar and Head of Investment Company Research at Numis from 2008 to 2019, said: “There have been huge changes since I joined the investment company industry in the early 1990s in terms of investment mandates, the nature of investors, discount controls and corporate governance. At that time, the sector was dominated by UK and global equity funds, with no representation from alternative asset classes, other than a few listed private equity funds. By contrast, around half of the sector’s assets are now represented by alternatives, with the introduction of a broad range of new mandates including infrastructure, renewable energy and specialist debt. The equity funds have tended to become more specialist, with far greater active management at the expense of index-hugging funds.”

Peter Spiller, Manager of Capital Gearing, said: “Investment trusts have in broad terms produced better results than their open-ended equivalents over the last 50 years, but they remain something of a niche product. In that period, open-ended funds have gone from being smaller than equity investment trusts, in aggregate, to a current level several times their size. Partly this has been due to trail commission, a distorting factor that has thankfully been abolished. Several trusts have managed to buck the trend by using a zero-discount mechanism, and in most cases, this has led to significant growth because it eliminates the threat of volatile discounts. This allows the virtues of investment trusts – independent boards, the possibility of modest gearing, and better performance – to come into greater prominence.

“Undoubtedly the quality of boards has improved over the decades with a much greater emphasis on looking after the interests of shareholders and communicating with them. Partly as a result discounts have narrowed dramatically, and the better investment trusts have been able to issue new shares. The structure of investment trusts has proved particularly suitable for new areas of investment such as venture capital, private equity, renewable and other infrastructure. In consequence, the gross size of the movement has grown rapidly.”

Jeremy Tigue, Senior Independent Director of abrdn Equity Income, Senior Independent Director of Monks and Manager of F&C Investment Trust from 1997 to 2014, said: “The main change has been how the industry has evolved and adapted to shareholder needs, launching new funds and products as existing markets evolve and new markets appear. I don’t go back to the 1950s but since the 1980s investment companies have become more and more shareholder friendly.”

Max Ward, Manager and Director of Independent Investment Trust and Manager of Scottish Mortgage Investment Trust from 1989 to 2000, said: “The most important change in the industry has been the move to make the product more attractive. Included in this has been the big increase in the amount of information available to investors, simplification of the investment process (for example through savings schemes and platforms), use of buy-backs to increase liquidity and add value at the same time, and leadership in fee reduction.”

What was the most challenging time in your career in investment companies?

Jeremy Tigue, Senior Independent Director of abrdn Equity Income, Senior Director of Monks and Manager of F&C Investment Trust from 1997 to 2014, said: “Personally, the dot-com boom and bust was the worst period. In the boom there was intense pressure to invest in new tech companies and then the bust was long and slow. The global financial crisis was much shorter.”

Max Ward, Manager and Director of Independent Investment Trust and Manager of Scottish Mortgage Investment Trust from 1989 to 2000, said: “The most challenging time in my career was the 2007/8 financial crisis. Having lived through the 1974 crisis, I naively thought that that had been as bad as it could get. I was therefore wholly unprepared for the collapse of the banking system. It took some time to recover from this, but the greatest lesson (which had been learnt in the 1970s but then forgotten) was to pay great attention to balance sheets. This seems pretty relevant today as we enter a monetary squeeze of uncertain severity and duration.”

Hamish Buchan, AIC Chair from 2005 to 2007, former Analyst at Wood Mackenzie and former chair and director of nine investment companies, said: “The 1970s were brutal. In May 1972 the average investment trust discount was 2%. Over the next three to four years the average discount went to 40% and the FT30 Share Index fell from 540 to 146 between 1972 and 1974. It was tough but the investment company sector came through this period and went on to thrive with better and more regular disclosure, shareholder information and performance attribution which led to greater confidence in the sector. There was better investment company research coverage too and my partner, Robin Angus and I played our part in raising standards across the industry.”

“Greater information has greatly helped the industry. In 1968 investment trusts NAVs were published once a month on a Friday in the FT and as now some were only published quarterly. I would have to get out of bed at 4.30am and go down to Waverley station to get a copy of the FT. I would then head into the office to check if my estimates were accurate in comparison to the actual NAVs.”

James de Sausmarez, Director and Head of Investment Trusts at Janus Henderson Investors, said: “The most challenging time of my career was in the late 1980s when the British Coal Pension Funds successfully bid for the Industrial and General Investment Trust and Globe Investment Trust, at the time the third biggest and the largest investment trust respectively in the sector. Both trusts were global generalist trusts and both were successfully bid for at a discount. The threat to the investment company sector was very real if institutions could find a cheap way to invest in the market by taking over an investment company or using an investment company for a back-door rights issue.

“This showed me that investment company managers must never be complacent, must always listen to shareholders and not be afraid to give money back if that was necessary. It also showed that if investment companies were to thrive again institutional shareholders needed to be replaced, making marketing to wealth managers and private investors crucial and both boards and investment managers needed to work together to make sure that the “City’s best kept secret” is not a secret but an easily accessible and attractive proposition for investors. The importance of continuing to do this is as real today as it was in 1989.”

Charles Cade, Director of Temple Bar and Head of Investment Company Research at Numis from 2008 to 2019, said: “I have been through numerous market cycles, including the Asian debt crisis, the dot-com bubble, the splits collapse and the global financial crisis. From a personal point of view, however, the most challenging event in my career was probably the decision of Merrill Lynch to withdraw from the investment company broking sector in the early 2000s, along with several other of the major investment banks. This reflected the fact that the sector was no longer strategically important to them, as it was UK-focused and the key buyers were private wealth managers. In contrast, the investment banks were focused on trading with the large global asset managers and hedge funds. I had the choice to stay as a specialist financials analyst but decided to move company to remain involved in the investment company sector, a decision that I have never regretted.”

Investment companies launched at least 70 years ago. All performance data is share price total return (SPTR) to 20 May 2022. Source: AIC using Morningstar.

– ENDS –

Follow us on Twitter @AICPRESS

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 £266 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.