In its annual review of investment companies, broker Numis Securities noted that over 100 funds are now trading at premiums, with the sector average discount at a historic low of 5.6% for equity vehicles and 2.8% for alternative trusts.
Alternative focus
More than three quarters of assets raised, a total of £6.15bn, went into investment companies in the alternatives space, focusing on areas such as debt, infrastructure, renewable energy and other specialist income mandates.
The year’s largest IPO was Riverstone Energy, which raised £760m in October. The company invests in the global energy sector, focusing on exploration and production and midstream energy sectors. Another notable success was Polar Capital Global Financials, which raised £153m in July, and was the only new fund with an equity mandate. Significant assets were also raised via the secondary market, with City of London raising £92m.
“The recent [investment company] IPO boom has been driven by funds focused on alternative income,” said Charles Cade, head of investment companies research at Numis. “The beta of these mandates is typically low, and premiums are likely to be sustainable so long as they continue to generate an attractive yield.”
Interest rate hedge
Many of the funds have floating rate or inflation-linked returns which should protect them from rising interest rates, said Cade. “In addition, discount control mechanisms are now far stronger than in the past, with buybacks now commonplace, and many funds offering periodic redemption opportunities.
"Furthermore, the drivers of investor demand remain supportive, with private wealth and multi-asset managers continuing to see strong inflows, and rising interest from retail investors supported by changes following the retail distribution review.”
With discounts at record low levels, Cade said value is now hard to find within the investment companies sector.
“Wide discounts are still available in some esoteric asset classes such as timber, early-stage mining or development property in emerging markets.
Dull in a good way
However, the realisable NAV of these vehicles is typically open to question, in our view. We still see some value in the listed private equity funds (other than 3i), and believe that now is a good time for contrarian investors to consider some of the single country emerging market equity funds such as India, Vietnam and Brazil.”
Despite their reputation as dull investments, mainstream global growth funds remain attractive long-term savings vehicles for private investors, Cade added.
