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29 November 2019

David Prosser takes a look at the record-breaking secondary fundraising in October.

In these turbulent times, it’s not unreasonable for investors’ appetite for risk to be limited. It was fascinating, therefore, to see figures from the AIC showing that investment companies raised more new money in October than in any previous month on record. Investors obviously haven’t been running scared of putting their money into closed-ended funds.

To be clear, the £1.28bn picked up by the sector last money came from secondary fundraisings – that is, new share issues by existing investment companies, rather than completely new fund launches, which have been rarer this year. Even so, this is new money flowing into the sector at a time when you might expect investors and their advisers to be sitting on their hands. After all, with an election to get through, further Brexit uncertainty ahead and a slowing global economy, this does not feel like the most auspicious moment to commit new money to the markets.

Why have investment companies been able to persuade investors to open their wallets? Well, one answer can be found in an examination of the specific funds raising money. They included a clutch of infrastructure funds, which raised more than £400m between them last month, two renewable energy funds, which picked up £380m, and an assorted range of funds offering exposure to other types of alternative assets, from royalty payments to property. Mainstream equities and bonds didn’t get a look-in.

Some of these funds offer highly attractive yields, so desperately needed with a return to higher interest rates looking as far away as ever. Others provide investors with a much-needed opportunity to diversify their portfolios – the best possible defence against volatility and uncertainty.

There was a time when retail investors confronted by the need for income or concerned by the prospect of market volatility would have faced a stark choice – leaving their money invested in conventional assets or switching into cash. But the investment companies sector has completely changed that. The closed-ended fund structure enables investors to take on exposure to a remarkably broad range of asset classes, many of which are highly illiquid or inaccessible, all through a liquid mechanism that makes it simple to get in and out. It has been an exercise in democratising investment.

In this context, it shouldn’t surprise us that investment companies are picking up so much new cash. The circumstances in which investors now find themselves is stoking up demand for a new approach to asset allocation that provides protection with upside potential. For all but the wealthiest investors and the institutions, the investment companies sector is the only supplier to be meeting this need.

October’s figures are also a reminder that while investment companies are closed-ended funds – they have a fixed size – they do have the option of issuing new stock in order to grow. Secondary share issues generally get less attention than new fund launches, but they provide much needed capacity – and give investors an opportunity to back funds with an established performance track record.

In time, no doubt, investors’ appetite for risk will return, particularly when (or if) we return to more normal times. At that stage, investment company managers may feel able to return to launching new vehicles where they detect demand. In the meantime, however, the secondary fundraising market for investment companies remains buoyant. Investors’ needs are being met.

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