While 2020 was a year many of us would rather forget, investment companies showed resilience. The average investment company returned 14%. At the end of December industry assets hit an all-time high of £229bn and the average discount of 0.4% was the narrowest in more than 20 years, a strong recovery from the lows earlier in the year.
Dividends were devastated last year but investment companies’ ability to boost payouts in tough times was much appreciated. Despite the dividend drought, 83% of investment companies investing in equities held or increased their dividends last year.
Dividends are never guaranteed, but investment companies’ revenue reserves are a big help in delivering consistent income. Investment companies can save up 15% of the income they receive each year and use it to boost or maintain dividends during difficult years.
Boards continued to work hard to protect shareholders’ interests in 2020. Thirty-two investment companies negotiated lower fees.
Boards replaced managers and we also saw the merger of Perpetual Income & Growth with Murray Income, with another merger proposed between Invesco Income Growth and Invesco Perpetual Select UK Equity.
Fifteen boards recommended a wind-up of their investment companies in 2020, recognising that it is sometimes in shareholders’ best interests to return capital.
Eight trusts get off the ground despite Covid
Despite the pandemic’s impact, last year saw eight new investment companies launch. Three are in the Renewable Energy Infrastructure sector, extending investment companies’ track record of investing in green energy.
However, two of the launches, Home Reit and Schroder BSC Social Impact, invest in accommodation for the homeless and social impact projects, demonstrating investment companies are continuing to provide investors with exposure to new and exciting areas.
Fundraising from existing investment companies remained exceptionally robust last year with £6.2bn raised. A big chunk of this fundraising was concentrated on sustainable and responsible investment, with the pandemic heightening investors’ interest in ESG themes.
So what does 2021 have in store? Lockdown three might suggest “more of the same”, but there are interesting developments that give more cause for optimism.
Investors demanding better ESG disclosures
ESG investing and how ESG is incorporated into investment strategies will continue to be an important trend this year.
We were expecting the UK to implement the EU’s ESG disclosure rules, but with a Brexit deal done, the UK has decided to be a ‘rule maker’ rather than a ‘rule taker’. There has been talk of implementing a green taxonomy – a common framework for determining which activities can be defined as environmentally sustainable.
However, rather than wait for the outcomes of these discussions the AIC is keen to move forward and meet the demand from advisers and investors for better ESG disclosure.
Another way in which the ESG debate impacts investment companies has to do with the “G” part of the acronym. This is because investment company investors, as shareholders, have a say in how their companies are run.
We will be helping them and their advisers understand how to exercise these rights, especially where shares are held on platforms. How do you vote your shares, attend an AGM, or hear about continuation votes or proposed changes in strategy?
We started work on this last year but in 2021 we’ll be doing more to help our investors stay up-to-date on their company and ensure their voices are heard.
See also: AIC fires back at claims trusts are less ESG friendly
Open-ended property fund concerns not going away
Clearly the concerns over the daily trading of open-ended funds investing in illiquid assets such as property are not going away.
The FCA’s decision on notice periods for property funds is much anticipated. We have argued that 90- or 180-day notice periods are not enough and that notice periods should be 12 months long to protect consumers and reduce systemic risks that can be caused by waves of redemptions.
It will also be interesting to see how open-ended funds will transition to the new rules. Investment companies, with their closed-ended structure, will continue to provide a tried-and-tested answer to the illiquid assets question.
Board diversity remains a priority
Another issue that we are continuing to work on is board diversity. Gender is just one element of diversity but the investment company industry has been making progress here. Investment companies in the FTSE 350 have women in 37% of their board seats, exceeding the Hampton Alexander target of 33% and ahead of other companies (34%) in the FTSE 350. Looking across the industry, 31% of investment company directors are female in comparison to just 12% five years ago, but there’s still more work to be done.
Last autumn we launched Pathway, our website to encourage a wide and diverse group of individuals to consider becoming investment company directors. We’ll be promoting the site this year and encouraging more people to think about becoming a director. Investment companies are not just interested in the more obvious competencies like asset management or accountancy. They’re looking for marketing skills, distribution experience and high-level business expertise, as well as more specialist knowledge of particular industries or sectors.
Whatever 2021 brings, it’s certain that all these skills will be much needed as we emerge from the pandemic to face a world that’s just slightly different to how it was before.
Annabel Brodie-Smith is communications director at the Association of Investment Companies
