David Prosser discusses this year’s record breaking net fundraising total.
The Association of Investment Companies’ latest statistics on fundraising make fascinating reading: although there is still more than three months of the year to go, 2015 already stands as the best year on record for net money coming into the sector. Taking into account IPOs, secondary fundraising issues and money going out of the industry, the closed-end fund sector has been buoyed by £3.93bn of new cash this year – more than ever before in a single year.
This is no flash in the pan – last year’s final net fundraising total came to £3.18bn, the third-best year on record, while 2013 was almost as good, at £3.10bn. Over the past three years, we’ve seen investment companies capture investors’ imaginations to an extent not seen in living memory.
The timing of the beginning of this upswing (2012 was a comparatively poor year) is significant – it coincided with the moment that the retail distribution review (RDR) came into force on 1 January 2013. With the end of commission bias, financial advisers began to consider the case for investment companies afresh – fund-raising has been increasing ever since.
Still, while RDR gave advisers pause for thought, encouraging them to think more broadly about potential investments for clients, the reforms are only part of the story. Advisers had a reason to reconsider investment companies; more significantly, however, investment companies have worked hard to ensure they have a compelling story to tell.
You can see that by looking in more detail into where this year’s fundraising has taken place. First, we’ve seen funds in specialist sectors such as debt and infrastructure pick up money – the illiquid nature of these asset classes makes them a good fit for investment companies; second, high-yielding funds have been very successful – again, investment companies have certain advantages here, including the ability to smooth out income payments over time, and to finance income payments from capital in certain circumstances; third, several of the large, generalist funds have raised money, capitalising on their appeal to investors in need of low-maintenance, broad-based exposure to international markets.
In other words, when advisers and investors came visiting, the investment company sector gave them a reason to stay. And the effect has been a virtuous circle. Heightened demand for closed-end funds has seen the discounts at which the shares of investment companies trade relative to the value of the underlying assets shrink to historic lows. Boards have sought to lock in these narrower valuations with the use of much more interventionist discount control policies.
The result of these developments is that, almost three years after RDR, closed-end funds are now a mainstream investment once again. Investors and advisers alike are no longer likely to reject them out of hand as arcane or complicated; in many sectors of the market, they recognise the sector as offering very specific advantages over other types of collective fund.
There is more work to be done however. On charging, the open-ended fund sector is mounting a comeback, cutting costs to compete with investment companies. Performance remains all-important, so it is encouraging to see boards taking action where managers disappoint. And distribution is a factor too – it remains frustrating that not all platforms offer access to closed-end funds.
Still, the latest figures underline just how far investment companies have travelled over the past three years. Will 2016 be even bigger?