Several investment trusts have been demoted from the FTSE All-Share index, losing the share price support from UK equity tracker funds.
In its most recent review of its indices, FTSE demoted six trusts from the Small Cap index to the Fledgling index.
The demotion means the trusts will no longer officially be within the FTSE All-Share index when the changes become effective on June 18. This will lead to them being sold by tracker funds whenever they next rebalance.
The action from passive funds is likely to hurt the trusts’ share prices as broker Numis Securities estimates tracker funds represent around 8 per cent of the FTSE All-Share market, so it is likely they held a similar amount in each demoted trust.
Ewan Lovett-Turner, investment company analyst at Numis, said: “Buying/selling from index trackers can have a significant impact on trading flows.
“Typically, we estimate that [circa] 8 per cent of share capital is held by index buyers.
“However, this will often be higher for the larger, more liquid companies in the index. The ownership is likely to be lower and more patchy at the smaller end as each small company has very little impact on the index as a whole.”
Mr Lovett-Turner added the selling from trackers varied, with some executing on the day the trust was demoted but others doing so over time.
“Given the illiquidity at the small end, I would expect most to do this over time,” he said.
The investment trusts have been relegated into the FTSE Fledgling index because they have fallen below the £84.1m capitalisation threshold required to remain within the FTSE Small Cap index.
One of the demoted trusts – BlackRock Emerging Europe – has suffered in the past year due to its exposure to Russian equities. Although the Russian market, and by extension the fund, has recovered in recent months, it was not enough to save the trust from the axe.
The other trusts relegated were: Shires Income, run by Aberdeen Asset Management; two private equity investment trusts Dunedin Enterprise and Candover Investments; the City Natural Resources High Yield trust, which is run by New City Investment Managers; and the niche fixed income company Acencia Debt Strategies.
However, the outgoing trusts have been replaced with seven investment companies moving up into the FTSE All-Share.
The headline new entrant is the Woodford Patient Capital trust, which was placed straight into the mid-cap FTSE 250 index due to its large size of more than £850m.
The other promoted trusts have moved into the FTSE Small Cap index instead, where they will still benefit from tracker fund flows.
Mr Lovett-Turner said: “We have seen significant buying of new entrants. Often funds have satisfied this by new issuance, to prevent funds spiking to significant premiums.”
The newly promoted trusts were largely from a range of niche asset classes, such as student property and direct lending, but included the Strategic Equity Capital trust, run by GVO Investment Management.
The other trusts promoted were Empiric Student Property, VPC Specialty Lending, Sequoia Economic Infrastructure, Target Healthcare Reit and Ranger Direct Lending.
WINNERS AND LOSERS FROM THE FTSE’S INDICES REVIEW
WINNER
Woodford Patient Capital
Neil Woodford’s Patient Capital trust only started trading on April 21, but it moved straight into the FTSE 250 index because it became the largest investment company launch ever after raising its upper fundraising limit from £500m to £800m.
The trust is set to invest in a plethora of early-stage companies, particularly in the technology and biotechnology sectors.
WINNER
Strategic Equity Capital
This UK smaller-companies trust is managed by Stuart Widdowson at GVO Investment Management, and has been rewarded for extraordinary performance in recent years with promotion to the All-Share index.
In the past five years, the product has delivered a total return of 362.7 per cent, compared with the 139.7 per cent average return for trusts in the IT UK Smaller Companies sector in the same period.
LOSER
Shires Income
This Aberdeen Asset Management UK equity income trust has been demoted mainly due to a widening of its discount.
While its net asset value (Nav) performance has been strong so far this year, the trust has moved from a 2.7 per cent premium to its Nav to a 6.7 per cent discount, which has pushed its market capitalisation below the £84.1m threshold needed to remain in the FTSE All-Share.
