2016: What have we learned?

What has 2016 taught us about investing in closed-ended funds? Well, analysts at Citywire argue that the year has been characterised by three themes in the investment company sector. And it is important to note that each of the three underlines why investing through closed-ended funds offers something inherently different for advisers and their clients.

The first of these themes focuses on the sectors that have performed most strongly over the past 12 months – emerging markets (particularly Russia and Brazil) and commodities. Both are sectors on the rebound from very difficult periods of trading during 2014 and 2015 when plunging commodity and oil prices fell sharply. And both are sectors traditionally considered riskier by advisers.

Investors with exposure to assets where there is potential for greater volatility – and a sustained run of poor performance – need to be able to take a long-term view and then to show patience. But that’s not always easy, particularly when the behaviour of other investors can potentially undermine your efforts. In an open-ended fund, a period of under-performance can very quickly turn into a full-blown crisis if investors start heading for the exit in droves and the manager is forced into asset sales. The structure of an investment company, by contrast, gives protection – the discount at which its shares trade relative to the value of its assets may widen as sentiment worsens, but losses in the portfolio do not have to be crystallised.

Theme two picked up by Citywire’s analysts is the trend towards greater shareholder activism we have seen in the investment company sector. This continued at pace during 2016, with managers replaced at a number of funds, and M&A action throughout the industry.

Again, this is a concept that is unique to the investment company sector, where funds are companies that contract with a manager for its services, operate with independent boards and are accountable to their shareholders. Importantly, this means that where investors are unhappy with the fund – whether for its performance or some other issue – they have a route to redress. Corporate action often leads to a short-term re-rating of the fund and then long-term change. 

The third theme identified by Citywire might be described as innovation. Despite a difficult market environment, we have seen a number of successful new issues in the investment company sector – investors have been persuaded to part with their money because they’ve been offered something new.

Typically, this has been something not available through any other fund structure – renewable energy assets, student property, asset finance and infrastructure, for example, have all been hits with investors who have no access to these investments via the open-ended fund sector. Often illiquid, these are assets only suitable for vehicles that can be confident they will be able to buy and sell at a time of choosing, rather than having their hands forced by inflows and outflows of investors’ funds. They may offer attractive income or a stable profile of long-term returns, but investors need the comfort of the closed-ended structure that an investment company provides.

More broadly, it’s worth saying that the debate about fund structure can sometimes be quite tedious – there is room for both investment companies and closed-ended funds in many investors’ portfolios, so this isn’t a binary choice. Nevertheless, 2016 has been another year in which investment companies have proved they have something very particular to offer to investors. Now we’ll see what the next 12 months holds.