According to the AIC, around a quarter of investment companies now trade at a premium – in its latest data for end of March this represents some 97 out of 395 vehicles.
Specialist funds in infrastructure and property are among the most notable themes populating this list with the likes of F&C Commercial Property, HICL Infrastructure and Bilfinger Berger Global Infrastructure among those on double-digit premiums.true
“Almost all of these companies are producing strong yields, reflecting the current thirst for income in this low interest rate environment,” says Annabel Brodie-Smith, communications director at the AIC.
“Also with markets rising, investment companies have performed well due to their benefits such as the closed-ended structure and gearing which has boosted demand and they are ideal for access to illiquid assets like infrastructure, property and hedge funds.”
Secure income story
Tim Cockerill, head of collectives research at Rowan Dartington, points out that infrastructure vehicles in particular – also including the likes of John Laing Infrastructure, International Public Partnerships, CFP Infrastructure Investments – have traded at a premium for a long time driven by this search for secure income. However, he warns investors to be careful.
“HICL today is on a premium of 14%, and it is yielding 5.3%. As an investor you have to appreciate that assets are valued at 14% more than their underlying worth and so you have to be prepared that this premium could come off. Your income is not going to be affected but when the interest rate environment changes and rates rise and fixed interest yields rise then I think infrastructure will be negatively impacted.”
Of the other funds on a premium, proven growth trusts, especially those with an Asian-slant, have also clearly proved very popular. However, Cockerill attributes this not just to strong performances but also, in some cases, a lack of choice.
Few options
He explains: “If you want to invest in Japan, there is Baillie Gifford Japan, JPMorgan Japanese and Schroder Japan Growth, plus a few options in smaller companies. When you’ve got a small universe of choice and you are an investor who favours investment companies, you are clearly going to home in on the best one you can find.
“In the case of Baillie Gifford Japan it has in the past 12 months gone from a discount of 13% to premium now of around 1.9%. That’s some move with the best part of a 15% increase in the share price through the closing of the discount to the move to a small premium. Investors need to appreciate that in different market conditions discounts could widen out again.”
