The first risk profile on a multi-asset investment trust by Dynamic Planner is being touted as reducing barriers for advisers to tap into the products, but concerns remain about equity beta risk on listed portfolios.
In August, the risk rating house announced it had granted the Seneca Global Growth & Income investment trust a risk rating of seven, out of a maximum possible rating of 10. That means one investment trust now has a risk profile compared to over 1,400 profiles for model portfolios and open-ended funds.
Association of Investment Companies head of intermediary communications Nick Britton says many advisers have told him that risk profiles or ratings are essential to their research process and had been a barrier to using investment trusts to access a multi-asset portfolio.
That’s despite significant growth in multi-asset investment trusts.
The AIC Flexible sector is the closest proxy available in the investment trust universe to a multi-asset sector and has seen assets grow 106% since its creation in January 2016, from £5.8bn to £11.9bn. That’s compared to 54% growth across all AIC sectors over the period, which now collectively hold £199bn.
Ruffer and Personal Assets among standout multi-asset investment trusts
Fairview Investing consultant Ben Yearsley says there’s no reason investment trusts shouldn’t be risk rated given some of the “very best” are multi-asset portfolios, he says, pointing to Ruffer and Personal Assets as examples.
Troy Trojan and Personal Assets are effectively mirrors, says Yearsley, who has used both Sebastian Lyon’s portfolios in the past. “They have the same underlying asset allocation and approach. The trust would be slightly riskier because of the fact the shares of the trust are listed and therefore could be different to the underlying assets.”
Trading costs and whether a platform even offers investment trusts have to be taken into account for each client when picking between funds and their sister investment trusts, he says.
Red Circle Financial Planning’s Darren Cooke doesn’t use risk-rated funds but reckons there could be a market for risk-profiled investment trusts.
“I’m sure being on this list may encourage some advisers to look at them or even use them but I would hope they would still conduct their own due diligence on the suitability of the fund for their clients beyond it just ‘matching’ a risk profile,” Cooke says.
But Wingate Financial Planning director Alistair Cunningham isn’t sold on the closed-ended structure. “Where a client does not want an ongoing service, a risk-profiled multi-asset fund can be appropriate, but we would generally prefer the low cost and flexibility of an open-ended investment vehicle as opposed to an investment trust.”
‘The problem with an investment trust is it is an equity’
GBI2 managing director Graham Bentley reckons while the risk profile will be good marketing for the Seneca Global Growth & Income investment trust, he doesn’t see a big market for multi-asset investment trusts among advisers.
While the AIC Flexible sector has £11.9bn in assets, the Investment Association mixed asset sectors held £231.1bn at the end of Q2 2020, representing 16.2% of the £1.4trn total funds under management. The AIC Flexible sector represents 6% of the total assets in the investment trust universe.
In any case, growth in the last couple of years in the advised space has been in model portfolios rather than multi-asset open-ended funds or fund-of-funds, Bentley says.
“The problem with an investment trust is it is an equity, it doesn’t matter what it’s invested in. And on that basis beta on the equity market will be one of the drivers for price.”
The divergence between share price and net asset value in the AIC Flexible sector currently ranges from a premium of 13.6% on JP Morgan Core Real Assets, which only launched in September 2019, to a 62.8% discount on Tetragon Financial Group.
But Britton notes the AIC Flexible sector is not limited to the traditional idea of a multi-asset portfolio that aims to provide a spread of various asset classes linked to a given risk level. For example, the bulk of Tetragon’s portfolio includes private equity, bank loans, event-driven equities, convertibles, quant strategies and real estate.
Besides Seneca Global Income & Growth, he points to Aberdeen Diversified Income & Growth and JPMorgan Multi-Asset as investment trusts that would fit most closely to the traditional definition of multi-asset portfolios.
Dynamic Planner says gearing is the biggest difference with rating investment trusts
Bentley reckons high equity beta adds an additional layer of risk from the client’s perspective. “I would expect a 60:40 portfolio in an open-ended fund to have a lower risk rating than a 60:40 portfolio in an investment trust.”
But in the case of the Seneca Global Growth & Income investment trust, the risk-rating is actually one notch lower than it would have been if it had been held in an open-ended structure, says Abhi Chatterjee (pictured), head of asset and risk modelling.
That’s because the investment trust holds less liquid holdings that would introduce additional risks if held in an open-ended structure. It also allows investors to benefit from the liquidity premium, Chatterjee says. He notes open-ended multi-asset funds or model portfolios can have high equity beta too.
The investment trust has 54.4% in equities, 29.2% in specialist assets, 10.6% in fixed income and 6% in gold and gold miners, according to its July factsheet.
Instead, Chatterjee describes gearing as the biggest additional risk introduced from a closed-ended structure. “People use gearing in two different ways: to borrow to invest more in the assets, in which case risk goes up; but in some cases borrowing is used to buy back shares. There, the investment risk has not increased, they are just managing the price of the shares.”
The Seneca Global Growth & Income investment trust currently has net gearing of 11% and the ability to go up to 25%, according to AIC data. Its discount currently sits at 0.6%.
The bulk of investment trusts in the AIC Flexible sector have no gearing, although RIT Capital Partners and Aberdeen Diversified Income & Growth both have gearing of 20%, according to AIC data.
