The shape of the investment trust industry is changing fast and, contrary to many expectations, it is not all down to the impact of RDR. In some sectors, notably those where income or income and growth are key parts of the equation, discounts have all but disappeared. Other sectors remain stubbornly on sizeable discounts, including both UK and European smaller companies plus – curiously in my view as it has so much to offer – private equity.
The global generalist trusts, many over 100 years old, soldier on. Even though it would be difficult to launch a new one today, they continue to perform a valued role for regular savers and long-term, risk-averse investors.
The hot new area is what analysts are starting to call alternative income. The figures are remarkable set against an overall backdrop of weak appetite for new issuance and an industry in danger of shrinking as more and more trusts buy back their own shares in a bid to tighten discounts.
New generation of trusts
A recent report from Dexion Capital has highlighted that this relatively new breed of investment company issued shares to the tune of £1.3bn in the first five months of this year alone. That figure is net of any share buybacks and is on top of a hefty £1.7bn raised in alternative income vehicles during 2012.
This new generation includes NB Global Floating Rate Income, Greencoat UK Wind and TwentyFour Income Fund. Also in the mix is HICL Infrastructure, a relative veteran given it was launched in 2006 and which has raised £167m so far in 2013 alone.
At a time when bank and building society deposits are returning so little, the prospect of a fixed income-style yield of typically 5%–6% derived from a diversified portfolio of assets is proving tempting, which is why these vehicles are selling off the page.
This all makes sense in today’s environment, although I would point out that investors are effectively lending money to these funds at historically moderate rates of interest. OK, it looks improbable just now but should the day ever dawn when base rates move up and through 5%, 6% and 7% pa once more, fixed income-style investment trusts could develop an attribute that newer investors might think is extinct – widening discounts to net asset value. This is not a current concern and I am merely advocating the constant vigilance that we should all be applying anyway.
Turning to another wildly popular area, namely income and growth vehicles, it is both intriguing and well deserved that Invesco Perpetual’s Neil Woodford has been awarded a CBE in the Queen’s Birthday Honours List. The award apparently stems – as highlighted by Professor John Kay in his recent UK government-commissioned review – from Woodford’s adherence to long-term, total return investment and exemplary standards of corporate governance.
I am pretty sure this award is a nod from higher authorities that this is the ethos they would like to see as the industry’s gold standard. From where I stand a number of trusts in the AIC’s UK Growth and Income sector, which includes Woodford’s Edinburgh Investment Trust, are already well on the road to achieving these goals. They currently offer a decent and growing dividend yield, an overall total return objective and, over the long term, have the chance to grow in capital value terms in what is certainly not an inflation-free world.
Private equity’s bright star
I have not even touched upon private equity, which is a sector that many professional advisers have major difficulties with but which, when done well, gives access to some of the brightest people in the entire sector and, to some, potentially attractive investment returns.
A story for another day, perhaps. But the key point when assessing the merits of the £100bn investment companies’ sector in the more level playing field of a post-RDR environment is that it is constantly evolving to match what investors want. Yet the sector remains introvert in nature and will rarely sell itself to you. You often have to go the extra mile to find the best and most suitable vehicles for your clients but that short journey can be worthwhile.
