Wipeouts jeopardise trusts’ role as ‘permanent capital’

Wipeouts jeopardise trusts’ role as ‘permanent capital’

Investment trusts have been told to “adapt to survive” after figures showed only a quarter of vehicles launched in the previous decade are still in existence.

Research by Numis found that 208 of the 326 trusts launched between 2000 and 2009 no longer exist. A further 31 adopted a “realisation strategy” and four merged into other vehicles.

Just 83 trusts, or 26 per cent, have survived, a trend which Numis attributed to factors including poor performance, wide discounts and mandates that have become irrelevant.

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Both report author Charles Cade and the Association of Investment Companies (AIC) noted that the figures encompassed the period just before the financial crisis, when a significant number of riskier trusts were launched.

But removing trusts that debuted between 2005 and 2007 paints an even poorer picture, with just 22 per cent of companies launched in the remaining seven years of the decade having survived.

The figures are much more positive for recent years, with the vast proportion of trusts still in existence. Mr Cade said there were reasons to suspect this cycle might be different, because of improving fee structures, improved corporate governance and changing investor bases.

But he added the statistics suggested the perception of trusts as stores of “permanent capital” was misguided, and encouraged the industry to “adapt in order to survive”.

“Investment trusts should be regarded as semi-closed-ended structures, rather than as permanent capital,” he said.

“They should enable investors to gain access to a less liquid asset class without locking them in indefinitely. In this respect, we believe more initial public offerings should consider offering shareholders a regular exit.”

Jupiter head of investment trusts Richard Pavry said it was becoming increasingly difficult for closed-ended vehicles to survive in traditional asset classes.

“You have to be doing something really different and better than an equivalent strategy operating in open-ended format to justify the use of the closed-ended format,” he said.

The analysis of trusts’ survivorship rate follows on from Lipper research, highlighted by Investment Adviser last year, which showed just half of UK-domiciled open-ended funds had survived the past 10 years.

The proportion of trusts to have lasted the same period is lower still, Numis data shows, challenging their status as long-term investment vehicles.

But the AIC’s Annabel Brodie-Smith said the figures showed how trusts’ boards were prepared to act in the best interests of their shareholders.

“This means we don’t see funds lingering on when they no longer deliver what shareholders want,” she said.