Board directors, analysts, wealth managers and industry commentators share their views on what’s next.
2018 has been a milestone year for the investment company industry. As well as marking the 150th anniversary of the launch of the first investment company, F&C Investment Trust, 2018 saw the industry’s assets reach an all-time high of £189 billion in September and the largest-ever launch of a UK investment company, Smithson, raising £822 million in October. With discounts at -2.6%, close to an all-time low, and the average investment company returning 254% over the past ten years, far outperforming open-ended funds’ return of 148%, it has been a strong period for the sector.
However, with the anniversary celebrations now drawing to a close it’s time to look ahead. What’s next for investment companies and what are the key trends of the future?
Investment companies in good health
Rachel Beagles, Chairman of the Association of Investment Companies said: “2018 has been a good year for investment companies despite the sell-off in October. Discounts have remained narrow and fund raising overall has been good, with a particularly strong October. It’s been interesting that although income-focussed alternatives have once again been a big feature in issuance, 2018 has seen a pickup in IPO activity for companies promoting equity and growth strategies, albeit each with clearly differentiated selling points.”
Charles Cade, Head of Investment Companies Research at Numis Securities said: “The investment company sector is in very good health, with record levels of new and secondary issuance in recent years. £11.9 billion was raised in 2017 via IPOs and secondary issues, and whilst the total in 2018 to-date of around £8.4 billion is lower, we have seen the largest IPO on record through the £822 million launch of Smithson. The sector’s assets grew by 13.7% pa over the five years to December 2017, outpacing the 11.9% pa growth in the assets of unit trusts/OEICs. Much of this has been driven by the strong demand for alternative income mandates given the low returns on cash or corporate bonds. However, there has also been significant growth in demand from UK retail investors via platforms. These investors have typically focused on funds investing in equities, with Scottish Mortgage and Finsbury Growth & Income being amongst the most popular.”
Simon Fraser, Chairman of F&C Investment Trust said: “It is remarkable to think that the original purpose of F&C Investment Trust has remained relevant throughout its long history, aligned to the principles it was founded on in 1868: long-termism, a pioneering approach and a desire to help investors of modest-means provide for their future. The world may look very different today than it did 150 years ago, but these tenets are as relevant now as they were back then.”
James Burns, Partner at Smith & Williamson said: “It’s been another successful year for the investment company industry. There have been a good number of new issues, including the biggest ever launch of a UK investment company, Smithson. What’s also been interesting, is that we’ve seen the launch of several equity investment companies, such as AVI Japan Opportunity, rather than just alternatives. There have also been lots of existing investment companies getting bigger through secondary issuance. What’s been encouraging too is that whilst there’s been volatility in recent months investment companies have not been unduly hurt. Discounts have not widened greatly.”
Tim Cockerill, Investment Director at Rowan Dartington said: “2018 has been a good year on the whole for investment companies, a lot of new issues and with a good breadth of mandates, which is something the investment company industry can uniquely offer. One that stood out for me in the alternative space was Hipgnosis (song royalties). It’s different and provides access to an asset class not previously available. Some raised fantastic amounts, whilst some managers I know were disappointed. This asset allocation is always interesting to watch. With many uncertainties on the horizon in 2019 the performance of the new funds will be watched keenly, as will the established funds, but I’m expecting 2019 to be quite a lot more challenging.”
Income remains important
Simon Elliott, Head of Investment Trust Research at Winterflood Securities said: “The trends that the investment companies sector has seen for several years now look set to continue in 2019. The closed-ended structure has clear advantages in providing exposure to less liquid assets classes and allowing greater dividend certainty. This appeals to a wide spectrum of the investment community, including institutional investors often in the form of multi-asset managers investing in alternative asset classes, while direct retail investors appreciate the certainty that ‘dividend heroes’ such as City of London and Bankers provide. Wealth managers remain key supporters of investment companies, investing in a wide range of asset classes and strategies, albeit the larger groups are increasingly outgrowing some of the smaller investment companies in the sector.”
Alan Brierley, Director, Investment Companies at Canaccord Genuity said: “A key feature of the evolution of the sector over the past 15 years has been the growth of alternatives. While we are encouraged to see the introduction of a number of high-quality equity investment companies in the past couple of years, we expect future growth to be dominated by alternative income. Notably, there has been a growing awareness that illiquid assets are not suited to open-ended funds and this should fuel further growth of the alternatives. A word of caution though, alternatives are not a panacea and we expect a polarisation between the fortunes of the underlying companies.”
Challenges but resilience is increasing
Charles Cade, Head of Investment Companies Research at Numis Securities said: “A challenge for investment companies is their ability to weather tougher market conditions, such as a significant correction in equity markets. Discounts tend to widen when investor sentiment is weak, and it may become more difficult for funds to grow through share issuance. However, the closed-ended nature of investment companies should help them as managers are not forced to sell assets to meet redemptions, and dividend yields can be maintained by using reserves if necessary.
“Furthermore, the sector appears in far better shape than before the global financial crisis, as funds generally have more conservative gearing, improved corporate governance, and discount control mechanisms that are better suited to the liquidity of their underlying portfolios. In addition, there is now a far broader universe of funds with mandates that have little correlation to equities such as infrastructure and renewable energy, as well as many of the specialist debt and property vehicles. Overall, therefore, we remain positive on the outlook for the investment companies sector and believe that the range of opportunities on offer is greater than ever.”
Stronger support from advisers
Mickey Morrissey, Partner at Smith & Williamson said: “The industry will see ever-increasing support from advisers who for years have failed to invest in investment companies. A combination of regulatory issues like MIFIDII, better education and access to investment companies means more support for them, either directly from advisers or from companies such as Smith & Williamson working alongside the adviser market.”
A greater focus on fees and liquidity
Simon Elliott, Head of Investment Trust Research at Winterflood Securities said: “Following RDR, investment management fees have been aggressively re-priced and independent boards have been instrumental in ensuring that their shareholders in investment companies benefit from the most competitive rates. This is a trend that looks set to continue. That said, we are increasingly concerned that the wider investment industry seems to be competing increasingly on price alone, a trend driven by the larger groups, many of whom have substantial passive businesses. We believe that active investment management remains legitimate and that fund managers can be incentivised to perform through the provision of performance fees.”
Alan Brierley, Director, Investment Companies at Canaccord Genuity said: “In terms of fees, there is no room for egregious fees and fee structures, and we welcome a compression of fees in recent years. We would look to boards to continue to deliver value.”
Rachel Beagles, Chairman of the Association of Investment Companies said: “The aggregated cost disclosures under MIFIDII, which distributors must now make from January 2019, will continue to focus the attention of platform users, advisers and private wealth managers on the costs and charges that their clients are bearing. Consequently, it’s hard to see the focus on costs and fees letting up. If anything it’s likely to increase. In addition to this, the consolidation within the private wealth management industry, and increased use of model portfolios and recommended lists, has produced greater focus on liquidity. So the focus on scale has never been greater. Investment companies will either need to demonstrate scale, and the benefits of increased liquidity and lower costs and charges, or clearly offer investors a differentiated investment opportunity, using the investment company structure, to succeed in this environment going forward.”
John Newlands, expert on investment companies and their history said: “As to fees, while the general downwards trend is to be commended, I see no sense in base fees on say the first £200 million being so low that the proposition is neither attractive nor financially viable for fund managers. The way ahead must be the greater use of tapering, such that fees fall away to 0.3% or even lower on higher total assets. Scottish Mortgage has set a fine example in this regard and arguably drawn in new investors - and thereby gained additional total fees - as a result and permitted share issuance at a slight premium. What’s not to like about that?”
Education: still more work to be done
Simon Fraser, Chairman of F&C Investment Trust said: “The financial services industry needs to create simple-to-use, transparent products that help everyone secure their financial futures in the long term. We are particularly focused on helping millennials access long-term solutions to help them achieve their ambitious plans. Our studies show that two in three 18-to-35-year olds have ‘traditional’ life goals but half of them do not hold any long-term savings or investment products. We also know a quarter of this group want help or education with investing. We’ll be working with a number of national educational institutions and non-profit organisations to deliver on this in the year ahead.”
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- Data source: AIC/Morningstar.
- Discount data is at 31 October 2018 and excludes 3i and VCTs.
- Investment company performance is share price total return to 31 October 2018 (excluding 3i and including VCTs). Open-ended fund performance is IA OE Total to 31 October 2018.
- *Denotes a corporate client of Winterflood Securities.
- 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 355 members and the industry has total assets of approximately £182 billion.
- 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.
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