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Giving investors what they want

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22 September 2015

Nick Britton, Head of Training at the AIC discusses the year’s IPOs and new issues to date.

Some monetary value hitting a record high is not necessarily news. Thanks to inflation, it happens all the time. But there is one (provisional) record high in the investment company sector that may be worthy of note.

So far in 2015*, the net amount of money raised by investment companies (excluding VCTs) is some £3.9 billion, higher than the total raised in any whole calendar year in history. This is the result of £5.4 billion entering the sector through initial public offerings (IPOs) and share issues, and £1.5 billion leaving through liquidations, redemptions and the like.

Of course, the numbers are small compared to the money going into the open-ended sector, which in a single month – July – saw £3 billion of net inflows from retail investors alone. But look behind that, and there are two pretty interesting stories about how investment companies are giving investors what they want at the moment.

The first is all about the parts of the investment universe that other collectives don’t reach. We’re talking unquoted companies, specialist debt and infrastructure in particular. The biggest chunk of the £5.4 billion was the £800m raised in the IPO of Woodford Patient Capital, which includes in its remit unquoted early-stage ventures, with another considerable slug of equity (£650m) brought in by the C share issue of P2P Global Investments, which invests in crowdfunded debt.

In fact, almost all the big raises are in alternative asset classes, including the IPOs of UK Mortgages managed by TwentyFour Asset Management (£250m), private equity vehicle Apax Global Alpha (£218m) and Sequoia Economic Infrastructure Income (£150m), which invests in the debt of infrastructure projects.

Many of these vehicles have income as their raison d’etre (with Woodford being the obvious exception). In many cases, that income is coming from an illiquid asset class that wouldn’t be suitable for holding within an open-ended structure, where funds must always be ready to sell off assets to meet demand for redemptions. The investors in these closed-ended vehicles clearly want income from a more diverse range of assets, and many of them are targeting yields in the mid to high single digits. That’s not a guarantee of course, and it’s worth remembering that alternative income sources may be just as vulnerable as conventional ones to interest rate rises – as and when they come.

The second interesting point behind the record net demand for investment companies has to do with another record high – the average investment company discount.

Admittedly, that discount is now slightly wider than it was a few months ago thanks to the turmoil of August, but it remains in the 2 to 4 per cent range it has occupied for the past two years (excluding VCTs). It’s easy to forget how extraordinary that is – it simply has never happened before in the 140-odd years of investment company history.

While the average is bolstered by the premiums to which some alternative assets have climbed, it also reflects the fact that many equity-based investment companies are in relatively high demand. For example, the UK Equity Income sector is currently trading at par (that is, a discount of 0%), the Europe sector is on a discount of 2%, UK All Companies is on 3%, and Global on 5%.

As a result, some investment companies in these more traditional sectors have been able to do tap issues, in much smaller amounts than the big ‘alternative’ issues, admittedly, but they still add up. Prominent examples are City of London, Finsbury Growth & Income, Perpetual Income and Growth, Strategic Equity Capital and Witan – these five alone have, between them, taken on an extra £209m of investors’ funds to manage so far in 2015.

With everything going so swimmingly, the contrarian will naturally wonder when the tide is set to turn. It’s interesting to note that investment company discounts, taken as a whole, proved pretty resilient during the August shake-up – but this doesn’t mean that they have become immune to market sentiment. As ever, advisers will want to concentrate on the fundamentals and stick to the plan rather than get caught up in market euphoria or panic.

* From 1 January 2015 to 3 September 2015 inclusive

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