I am occasionally asked for my view on investment trusts and whether they are an overhang from a previous investment era.
Let’s face it, I cannot remember the last time I assessed a new closed-ended fund launch that was not some form of ‘specialist’ vehicle. It is a fair question, as despite having a longer history than the open-ended funds the closed-ended world is a fraction of the size.
One of the biggest hurdles is that it is market traded which puts many intermediaries off, as they have difficulty with the discount/premiums, gearing and the need to trade through a broker. Most fund platforms cannot facilitate, and those that do should have an advantage. In essence, there is an acceptance that open-ended funds are just easier to deal with.
There remains a vibrant and loyal following within the closed-fund world, but this group can be split into two. The first is the more traditional investor seeking some form of bargain in a discount-based assessment of long-established mandates, such as generalist global equity investing. There is merit in this as the skilled investor can find out-of-favour funds and take advantage of technical factors, which can lead to superior performance.
The second group involves those seeking ‘specialist’ trusts. These have become popular as they provide something the open-ended world cannot: good access to illiquid assets – the space where the majority of the growth over the past 10 years has been concentrated. Admittedly, not all have been a qualified success – funds of hedge funds spring to mind. However, areas like private equity have historically been accessed in this way by traditional private client managers.
Direct property, while not covering itself in glory during the global financial crisis, appears to have learned some lessons since; in fact, one could argue these funds have navigated the Brexit fallout better than their open-ended brethren.
More recently, low-volatility, high-yielding asset-backed strategies such as infrastructure and renewable infrastructure have found favour with managers challenged over reliable and attractive levels of income. One only has to look at the premia commanded here to understand that demand is outstripping supply.
While the traditional closed-ended company has its place, the future lies in providing access to investment strategies that the open-ended world cannot: illiquid mandates. The structure is its saving grace.
They will continue to innovate and provide access to asset classes that would otherwise be precluded from the retail or multi-asset investor. Not all of these will be a success and I have doubts over some of the sector’s more recent additions but, in a yield-hungry environment, 5 per cent plus yields are hard to ignore.
It is highly unlikely that we will see many global equity generalist closed-ended launches in the coming years. However, the appetite for something different, which the open-ended world cannot provide, remains – and will be the one area of growth.