Alternative finance could be the focus of the next wave of expansion in investment trusts, as managers look to peer-to-peer (P2P) lenders for steady returns.
Low interest rates and tighter regulation of traditional finance are pushing managers to seek returns from alternative finance, such as P2P and some forms of crowdfunding.
Andrew Summers, head of collectives and fund research at Investec, said that investment trusts are particularly suited to P2P finance as they allow for investment in illiquid credit strategies.
“Peer-to-peer is the next big thing in this area,” Mr Summers said.
Unit trusts are not be able access P2P due to their open-ended nature, but investment trusts can maintain a steady portfolio and net asset value (NAV) because shares are bought and sold on an exchange. Unit trusts often experience fluctuations in value depending on how much money consumers invest in the funds, making them impractical for illiquid assets such as P2P.
Nick Britton, head of training at the AIC, said, “Investment trusts allow for investment in a wide range of assets compared to other collectives. They are particularly suited for illiquid assets because managers do not have to sell those assets when people sell shares, unlike unit trusts who have to sell to meet redemptions.”
Other examples of areas that can only be accessed by closed-ended funds include private equity, hedge funds, and credit strategies. Mr Summers estimated that roughly 10 per cent of investment companies invest in areas that are inaccessible to unit trusts.
Investment companies trade at a premium – when the price per share is valued at more than the underlying NAV – or a discount – in which case the share price is less than the NAV. Private equity is currently trading at the lowest sector discount of 20 per cent, while infrastructure is trading at the highest premium of any sector at 9 per cent.
“Market sentiment is a big driver of premiums and discounts,” said Mr Britton. “Premiums reduce the yield because a higher price equals lower yield. But people are still willing to pay to get those returns.”
Managers could also be able to magnify their return, or potential losses, in P2P investments through the use of gearing – another feature only available to investment trusts.
