With the FCA and the Bank of England throwing a spotlight on liquidity mismatches within open-ended funds, the suitability of investment companies for illiquid assets such as property and infrastructure, as well as less liquid equities such as smaller companies, is being more widely recognised.
Investment company assets reached a record high of £202bn at the end of 2019, with much of the industry’s growth in recent years due to strong demand for less liquid assets and alternatives.
Performance and discounts narrow
Performance has been generally good. The average investment company was up an impressive 18% in 2019 and perhaps more importantly 197% over 10 years.
Discounts have remained fairly narrow with the average investment company discount reaching -3.2% at the end of December, having closed in from -6.2% at the end of September.
The best performing sector in 2019 was Technology & Media, up 40%.
After the UK’s Brexit and political drama, it’s so encouraging to see UK sectors the second and third best performers of 2019 with UK All Companies up 39% and UK Smaller Companies up 38%. The discounts on both these sectors have narrowed dramatically over the year, with UK All Companies moving from -11.6% in January to -3% at the end of the year and UK Smaller Companies moving from -9% to -3.4%.
Discounts reflect market sentiment. We know there will be a US election in November 2020 but inevitably there will be new worries – we’ve already seen the situation in Iran.
Alternatives investment companies dominate 2019 fundraising
In 2019 existing investment companies raised a record £7.4bn with three alternative investment company sectors raising the most – Renewable Energy Infrastructure (£1.8bn), Infrastructure (£952m) and Property – UK Commercial (£754m). Interestingly, the fourth biggest sector was an equity sector, UK Equity Income, raising £424m. The fundraising from the UK Commercial Property sector is in stark contrast to the record £2.2bn of outflows from UK open-ended funds.
Although IPOs were subdued in 2019 due to the political uncertainty there are tentative signs that confidence is returning following the election rally. In the first weeks of 2020 two proposals for IPOs have been announced: The Global Sustainable Farmland Income Trust and Nippon Active Value Fund. Sentiment is a key driver of the IPO market and we will have to see how this develops in 2020.
Industry awaits regulatory response to Woodford
Of course, the story that dominated 2019 is not going away in 2020: the collapse of Woodford Investment Management resulting from a run on its flagship fund.
Though the underlying assets were different, the liquidity mismatch was reminiscent of the problems faced by open-ended property funds during the financial crisis and after the EU referendum, when many of these funds were suspended. As I write, M&G’s £2.5bn Property Portfolio remains gated.
So let’s hope 2020 will see a sensible regulatory response which will restore investor confidence in these funds.
More than 40 investment companies reduce fees
Following the trend of recent years, investment companies are continuing to reduce costs for their investors and in 2019 there were 41 investment companies that cut their fees.
This included six investment companies which introduced tiered fees for the first time, in a year when a report from CFA UK concluded that tiered fees were “best for retail investors” and “an effective way of aligning the interests of managers and investors”.
The percentage of investment companies with tiered fees has more than doubled to 39% in the last five years and it’s good to see independent boards continuing to work for shareholders’ benefit by bringing charges down.
Undoubtedly 2020 will bring its challenges but the investment company industry has never been larger and recognition of its structural advantages is growing. While no-one knows what the year will bring, we remain confident in the ability of the investment company structure to deliver strong long-term performance for shareholders.
Annabel Brodie-Smith is communications director at the Association of Investment Companies
In partnership with Portfolio Adviser, the 2020 Investment Trust Roadshow – How to Invest Calmly in a Volatile World will visit six towns across the UK between 4 and 13 February. Aimed at investment professionals and featuring speakers from Baillie Gifford, Edison Group, Franklin Templeton, J.P. Morgan Asset Management and Schroders, the roadshow will take in Edinburgh (4 February); Harrogate (5 February); Manchester (6 February); Birmingham (11 February); Bristol (12 February); and London (13 February). To register your place or find out more information, please click here
