InvestmentsFeb 16 2015

Investors steer clear of small trusts

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Investors steer clear of small trusts

There has been a sharp rise in the number of investors shunning smaller investment trusts, according to a poll of investors at the Winterflood Securities 2015 annual conference.

Demand for trusts has been increasing in recent years but investors are increasingly concerned that vehicles of less than £200m in size could be too small in which to make viable investments.

Winterflood said the problem came as wealth managers had become increasingly big players in terms of assets, meaning they required more liquid destinations for their clients’ capital.

Some 9 per cent of delegates at the conference said they would not consider buying a trust with a market capitalisation – or total stockmarket value – of less than £200m.

When the event was held last year just 1 per cent had said they would not go below £200m, in a sign that there has been a dramatic increase in concern about small-trust viability.

Winterflood said that roughly 170 investment trusts, or 56 per cent of the industry, were less than £200m. Seven out of 13 of the trusts in the UK All Companies sector were smaller than £200m, including the Artemis Alpha Trust, the Schroder UK Mid Cap and the Henderson Opportunities Trust, according to the Association of Investment Companies.

The findings from the Winterflood Securities 2015 annual survey were revealed in a monthly report by the company. It said as wealth managers had grown in terms of assets under management in recent years, they had increasingly “struggled to justify exposure to smaller investment trusts”.

“This is a result of potential liquidity requirements in the secondary market, with size being a good indicator of liquidity,” it said.

Liquidity “is one of the reasons why certain investors are loathe to invest in funds with market caps below a certain size”, the broker firm added.

Gavin Haynes, managing director at Whitechurch Securities, said he thought many financial advisers also avoided trusts due to liquidity concerns.

Whitechurch did recommend trusts, he said, but only if they were a “certain size, which is around about the £200m mark”.

There has also been a drop in demand for ultra-small trusts.

At the Winterflood conference, 51 per cent of those surveyed said they would invest in a trust that was £100m in size. This compared with 72 per cent of delegates that last year said they would recommend an ultra-small trust.

“There is no doubt that there is a clear preference for larger investment trusts, ideally with market caps greater than £100m or even larger,” the Winterflood report said.

“However, a significant proportion of investors are prepared to be pragmatic and invest in smaller vehicles.”

Still, the company warned: “The concern for the industry is that liquidity requirements for the larger wealth managers may increasingly restrict investment in smaller funds, leaving them without key buyers.”

However, while investors were increasingly unwilling to invest in smaller trusts, there was a growing feeling that liquidity conditions had improved.

Half of respondents to the survey said they had noticed a rise in investment trust market liquidity.

“Around a third of the universe [is] trading on a premium or around net asset value, [and] more than 50 investment trusts issued shares through the secondary market last year,” Winterflood added. “We suspect that this, for many, has had a positive impact on their perceptions of liquidity.”

Milton: Smaller trusts often make for compelling investments

Advisers should not be too quick to write off small investment trusts, according to one independent financial adviser.

Philip Milton, director of Devon-based Philip J Milton, said smaller-sized trusts often made for compelling investments.

He said: “Small size can affect marketability and spreads, but also what a wonderful opportunity.

“We have exploited this very successfully over the years.”

Smaller trust managers could diversify and have an “eclectic range of holdings” that larger managers would not be able to buy because of their large size, he said.

Mr Milton added: “How many big managers can’t manage the funds entrusted to them properly because they can’t buy enough of what they might otherwise want to buy? “So you end-up with a dumbed-down result.”