Although most investment companies invest in conventional equities, their closed-ended structure means that they can also access less liquid asset classes that other funds cannot offer.
This is because closed-ended funds do not have to redeem units when investors wish to sell. Instead, investors sell their shares on the stock market to other investors. This has no effect on the underlying portfolio of the closed-ended fund.
To illustrate this, consider physical property. Open-ended funds that invest in physical property sometimes need to suspend trading in their units, because too many investors want to sell and the fund cannot dispose of the underlying properties quickly enough to meet redemptions. Closed-ended property funds, on the other hand, have no need to sell properties until the fund manager is ready to do so, even in severe market downturns. This means they can use downturns as an opportunity to buy properties at knock-down prices.
Investment companies offer access to the following alternative asset classes:
There is a wide range of investment companies investing directly in property. Some specialise in commercial property, others in residential. Some focus on particular niches (for example, GPs’ surgeries, large warehouses or student accommodation). Some invest primarily in the UK, others in Europe or even further afield. Many investment companies that invest in property are structured as REITs.
- Private equity
Several investment companies invest in private companies, as opposed to companies whose shares are traded on stock markets. They can do this either by buying shares in private companies directly, or investing in private equity funds (known as limited partnerships or LPs) that themselves acquire stakes in private companies. An offshoot of private equity investing is Venture Capital Trusts (VCTs).
There are several investment companies that invest directly into infrastructure projects. This gives them an income stream which is highly predictable and often backed by government contracts or regulation. Often this income is linked to inflation.
Investment companies can also invest in a wide range of fixed income investments, not just government and corporate bonds. This might include less liquid forms of debt such as asset-backed securities, direct loans, distressed and sub-investment grade debt and peer-to-peer loans. These types of assets tend to provide a high level of income, though they can carry higher risks.
Investment companies offering access to alternative assets have grown in size and number in recent years, and now account for over a third of all investment company assets.