Ian Sayers, chief executive of the Association of Investment Companies, said the minimum market cap some large wealth managers demand before investing has increased to £200m, despite £50m being the benchmark figure just a few years ago.
“Firms that have got bigger through consolidation and started running model portfolios have to deal in larger volumes, which is where the liquidity of shares becomes important.”
Mr Sayers said some wealth managers and private brokers think liquidity in investment trust shares has been getting worse, which he disputed, adding: “The trouble is the demand for liquidity has been racing ahead”.
“I don’t think there is a liquidity problem. It is to do with the growing number of larger shareholders.”
I don’t think there is a liquidity problem. It is to do with the growing number of larger shareholders. Ian SayersFirms who want to deal in more than £100,000 find themselves restricted to 25 per cent of the AIC’s 344 members, he said, adding the fear is some of the big investors start to move away from investment trusts.
Innes Urquhart, analyst on the investment trust research team at Winterflood Securities, said a market capitalisation of £100m is still often quoted as being the minimum size for a fund to be considered by private client brokers and wealth managers.
He said, however, there is “anecdotal evidence” to suggest this level has increased for some companies.
For example, Mr Urquhart pointed to the recent roll-over of the Henderson Global Trust, where the manager cited a lack of scale as a major reason for the decision, despite the trust having a market capitalisation of £135m at the time.
“The desire for funds to be a certain size creates challenges when it comes to launching new funds, although a number of investors are willing to back smaller launches if they believe the fund will be able to grow.”
He also said it is wrong to suggest funds below a specific size are unviable, adding larger funds sometimes offer limited liquidity.
“However, in general, smaller funds do tend to trade on wider discounts and also tend to be less liquid, meaning many private client brokers and wealth managers are understandably cautious on investing too far down the size scale.”
Stephen Peters, investment manager at Charles Stanley, said consolidation can cause a “loss of dispersion” in the industry.
He said Charles Stanley does not include any trusts of less than £200m on its list of recommendations, but that does not mean individual investment managers cannot buy them.
This restriction on choice, he said, is deliberate because the firm does not want to encourage investment into trusts which are like “lobster pots”, where you can get in but you can’t get out.
“If we end up owning 30 per cent of a tiny trust and the manager leaves and we want to get our money out, then that is not a good place to be.”
According to Mr Sayers, more than half of the AIC members are in the alternative space, which Mr Peters said could be a problem when sentiment towards the alternative sector declines and investors want to buy back their shares.
“There are too many small investment trusts and the big players should employ a consolidation vehicle to clean some of them up.” Dan FarrowLee Robertson, chartered wealth manager of Investment Quorum, said his firm is less concerned about the size of the trust, looking instead at the fundamentals of good management, good stock-picking and the outlook going forwards.
“As a boutique we are happy to go into smaller trusts if the fundamentals stack up. We don’t have capacity issues due to the smaller amounts we can commit, unlike many of the larger wealth managers who need trusts with lots of available capacity and liquidity.”
katherine.denham@ft.com
