Liontrust’s failure to launch its highly publicised and hotly anticipated ESG Trust (ESGT) reflects how challenging fund raising remains and points to a difficult road ahead for other investment companies hoping to get off the ground.
Liontrust took the industry by surprise last Friday when it announced it would be scrapping its first investment trust, just days before it was due to launch, after failing to meet its £100m target.
Analysts had been speculating only weeks ago that the trust stood a good chance given lead manager Peter Michaelis (pictured) and the sustainable team’s decades of experience and success managing Liontrust’s £10.2bn open-ended range, which has quadrupled in size since 2017.
Unlike the existing Oeics, ESGT would have held a more concentrated portfolio of 25-30 stocks, compared with 40-50 in the open-ended Global Growth mandate, and allowed exposure to smaller companies of around $1bn, which Michaelis described as “pure plays” and companies that have the “strongest sustainable characteristics”.
See also: Liontrust ESG Trust IPO cancelled
Investment company fund raisings have hit record levels in H1
Chelsea Financial Services managing director Darius McDermott is “genuinely surprised” Liontrust failed to get its debut trust off the ground, especially given how hot the London IPO market has been this year.
Baillie Gifford’s Schiehallion fund, which targets global “unicorns,” took in over $700m (£506m) from wealth managers and institutions in a heavily oversubscribed C-share issue in April, McDermott notes.
Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), points out that investment company fund raisings have hit record levels.
So far, five trusts have launched this year, including two in the renewable energy infrastructure sector, raising £1.2bn, the highest first-half total in four years.
“There has been strong demand for income-generating alternative assets with the new companies investing in digital infrastructure, energy efficiency and shipping,” Brodie-Smith says.
Sign of ESG product fatigue?
However, JB Beckett, independent fund board director and former fund selector, says this is not the first time impact and climate-led closed-ended asset raisings have come up short.
Most recently the Schroders BSC Social Impact trust raised £75m last December, falling short of its £100m target.
Beckett finds this “puzzling” given closed-ended vehicles are a natural fit for impact-type assets as they can keep size and capacity under control.
Tilney managing director Jason Hollands says the trust “would have brought something refreshingly new to the UK investment trust sector”.
However, he adds: “There has been such a proliferation of new ESG funds in recent years you have to wonder whether this is a sign of product fatigue in this space.”
Investors have continued to pump money into open-ended responsible investment funds this year. At the end of May total assets in the sector stood at £73.2bn or 4.8% of the industry’s total £1.5trn and up by a third since the end of 2020, according to the Investment Association.
Last year savers ploughed close to £1bn a month on average into responsible funds. This year inflows have been even stronger on a monthly basis, excluding February when funds lost £198m as attention turned to cyclical and recovery plays.
Responsible Investments net retail sales 2021
| January | £1.2bn |
| February | (£198m) |
| March | £1.6bn |
| April | £1.6bn |
| May | £1.3bn |
Source: Investment Association
Few trusts outside income sector finding success with launches
Fairview Investing director Ben Yearsley thinks ESGT’s failure to launch says more about how difficult it has been to get investment trusts off the ground recently.
Last year saw several high-profile launches called off, including Tellworth British Recovery & Growth and Sanford Deland’s Buffettology Smaller Companies trust. Meanwhile the rival Schroders British Opportunities trust only managed to scrape together £75m of its £250m target.
See: Stars align for Schroders £250m investment trust IPO after rivals failed to launch
“Everything Liontrust has touched in the last few years has turned to gold,” Yearsley says. “But the history of new launches over the last year has been poor for anything other than income, so, in that sense it’s not a surprise actually.”
Yearsley finds it telling that in its statement on Friday Liontrust was quick to tout the 2,000 private investors who committed to the IPO.
“It sounds like they didn’t manage to get the institutions, and that’s clearly the problem,” Yearsley says. “Retail money is the icing on the cake, but you need those cornerstone institutions to get investment trusts off the ground.”
Having a “big name” is no guarantee of success either, says Interactive Investor head of funds research Dzmitry Lipski.
“There is already a lot of choice in the funds universe for sustainable options, not least from Liontrust, so we do not see this as a sign that the ESG universe is starting to waver,” Lipski adds. “More that competition in the ESG universe is strong and investors have a lot of great options to choose from.”
£100m target size too small for some investors
ESGT’s target size of £100m could also have put investors off from investing.
One fund buyer told Portfolio Adviser they would have needed the fund raise to be above the £300m mark to feel comfortable supporting it, and said they knew other investors who felt the same.
Liontrust’s difficulty in meeting its target might also signal that investment trust investors are behind Oeic investors when it comes to ESG. The sector itself has been accused of playing catch-up when it comes to responsible and sustainable investing, having far fewer options compared to the myriad products in the open-ended sector.
Typically trusts are funded by active managers, institutional investors and DFMs, says Beckett, so it’s possible there is “a divide between the mainstream narrative and what wealth managers are allocating to”.
“One of the key disconnects I see is the transition of bulk assets by insurance companies and pension schemes into lightly ESG tilted indices, which trusts are not benefitting from,” he says.
“The drive to ‘net zero’ has also overly narrowed the focus of some asset owners to one of carbon reduction. Therein engagement of broad portfolios appears to be winning over purposeful investment. This appears to have forsaken all other factors.
“Yet I am surprised given Liontrust’s credentials and the broader drive towards sustainable development goals.”
‘If such an appealing package can’t get off the ground, it does suggest others will struggle’
ESGT’s failure to get off the ground doesn’t bode well for other trusts hoping to launch this year, says AJ Bell financial analyst Laith Khalaf.
“Liontrust ESGT was to be run by an established and respected team, in a popular investment area, at a time when market confidence is high,” Khalaf says.
“If such an appealing package can’t get off the ground, it does suggest others will struggle, and the fact other trusts have failed to achieve critical mass does suggest there is an ongoing lack of demand in the market.
“IA figures show there is continuing strong demand for ESG products, but the fact that other trusts investing in this space are trading at a discount may have led investors to question why they would pay full price to get exposure.”
