Reflecting on a record-breaking year

David Prosser looks back on the year and gives his thoughts on why there has been so much new money flowing into the sector.

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While some parts of the collective fund industry have had a tough year in 2019, the same cannot be said of investment companies. Contrast the fortunes of open-ended funds, still mired in the row over illiquidity and closures, with the investment company sector, which has raised more money this year than ever before in its history.

Data just released by the AIC reveals that investment companies have issued £6.9bn worth of new shares since the beginning of the year, almost a third more than in 2018 and significantly ahead of the previous £6.3bn record set in 2017. To be clear, this is fund-raising by existing companies with a track record, rather than IPOs, where the figures have been more subdued (hardly surprising in such an uncertain climate).

Why is so much money now flowing into the sector? The short answer is that investment companies are doing an excellent job of understanding where demand from investors is strongest and then catering accordingly. They’re meeting a need, in other words.

That’s evident, for example, in the number of funds offering strong income streams that have been able to raise money this year. Investment companies are uniquely able to smooth out dividend distributions from year to year, enabling them to keep paying decent yields when income slows. In the current low interest rate environment, that’s invaluable.

Elsewhere, the opportunity to gain access to new asset classes is clearly striking a chord. Some £1.6bn of the money raised this year has gone into renewable energy infrastructure funds, offering exposure to green investments offering reliable dividends and the potential for long-term capital gains; this is an asset class where illiquidity has previously limited investors’ options.

However, the story of investment companies is also one of doing the basic things well. Cost is the most obvious example. With the trend towards passive management continuing as investors continue to focus on charges, the investment company sector still offers a more competitive deal than its rivals, despite price cuts from many open-ended funds. In fact, no fewer than 41 investment companies have reduced their charges in 2019.

On performance, meanwhile, the industry shows the way (and, of course, low charges are no compensation for poor returns). In particular, this has been a year when investment company boards have flexed their muscles, with a significant number of funds changing manager after a period of disappointing returns. The value of the investment company governance structure, where independent directors have a legal responsibility to represent shareholders’ best interests, should not be underestimated.

There have been other factors in investment companies’ popularity too. There is no doubt that financial advisers, who once had their reservations about the sector, are increasingly willing to consider it. Many funds have worked hard to improve their relationships with intermediaries. The travails of open-ended funds such as Woodford Equity Income have no doubt helped the closed-ended fund sector’s cause too.

Still, investment companies are succeeding on their own merits. Delivering a low-cost, efficient and targeted value proposition, they offer investors – and their advisers – a broad range of financial planning opportunities. Expect more funds to raise money successfully in 2020.