InvestmentsAug 4 2014

Specials prove a popular pick

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The first half of 2014 has been an active one for the investment trust market, with a particular focus on vehicles providing income and also more alternative investment options.

Figures from the AIC show there have been nine new investment trust initial public offerings (IPOs) for the year to the end of June, with five of these sitting in a Sector Specialist category, while a further two are focused on property.

Many of the new launches are in higher yielding sectors, targeting that most valuable objective for investors in the current environment – income.

Ian Sayers, director general of the AIC, says, “The biggest factor in IPOs in the last few years has been the demand for income. Investment companies are able to access a much wider range of income-producing investments than other funds.

“As these asset classes have often been illiquid, it makes sense to offer them in a closed-ended fund like an investment company, where the stockmarket listing provides investors with an easy way to buy and sell the shares without any impact on the portfolio.”

Indeed, of the nine new launches in 2014, two now sit in the Sector Specialist: Debt peer group, a further two are in Sector Specialist: Renewable Energy, while another sits in Sector Specialist: Commodities and Natural Resources.

The popularity of these more niche asset classes is nothing new. In 2013, of the 14 new investment trusts launched, 10 sat in a specific Sector Specialist category, a further two were invested in property, considered by some to be a specialist area, with the remaining two invested in the Asia Pacific region.

In addition, data from the AIC show that five of the top 10 onshore investment trust launches in the past 10 years have been in specialist sectors including financials, property, debt, environmental and biotechnology and healthcare. Looking at the top 10 offshore launches in the past decade, specialist or niche areas make up the full list of launches, including asset classes as diverse as private equity, hedge funds, property, infrastructure and debt.

A key driver for the growth in specialist sectors could be easily explained by the investment trust structure, which allows them to deal in illiquid areas as there is no issue of sudden outflows or inflows.

But while access to these niche areas is handy to have, many retail investors seem to prefer the larger, more generalist funds.

A spokesperson from Henderson Managed Investment Trusts notes: “There is a divergence between investment trust retail investors and institutions that are interested in specialist funds.

“Indeed, the specialist funds are particularly popular with institutions, who see them as a short-cut to accessing niche investment themes. Retail investors still tend to favour the big, long-lived generalist funds that provide a solid base for their savings over the long term.”

As a result it is not surprising that the most popular sectors in the first three months of 2014 were the Global Growth and UK Growth and Income sectors, according to research from Matrix Solutions. Its report says the “Global Growth sector and the UK Growth & Income sector account for the majority of investment company purchases, with each sector accounting for 18 per cent and 14 per cent of the total purchases in Q1 2014 respectively”.

Meanwhile, more niche areas such as hedge funds are towards the bottom of the table with less than £1m of sales in the first quarter, though infrastructure continues to be popular, underlining the belief it is starting to be considered a more mainstream asset class.

The largest new issue so far this year, however, has come from the Property Direct: Europe sector in the form of the Kennedy Wilson Europe Real Estate investment trust, which raised £910m – the largest IPO in nine years, according to the AIC. With property prices rising, it seems investors may be reverting to pre-crisis ‘safe havens’.

But Mr Sayers adds: “It is no surprise that the most popular sectors being recommended by advisers are the solid generalist investment companies in the Global Growth and UK Growth and Income sectors. But it is also pleasing to see advisers seeing the benefits of investment companies in accessing illiquid asset classes such as property and infrastructure. The closed-ended structure, where managers don’t have to worry about redemptions, makes them ideal for accessing these areas of the market.”

With the macroeconomic environment uncertain, and the threat of rising interest rates in the UK and US, the allure of niche asset classes with higher yields could see investment trusts retain their popularity.

Nyree Stewart is features editor at Investment Adviser