UKOct 31 2016

Assets reach new heights despite slow start to year

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Assets reach new heights despite slow start to year

Investment trusts, like the rest of the UK asset management industry, are facing ongoing uncertainty as prime minister Theresa May seeks to extricate Britain from the EU.

Closed-ended funds are not immune to the upheaval in markets and currency volatility but they have shown remarkable resilience so far, as figures from the Association of Investment Companies (AIC) reveal.

“Assets under management in the investment trust sector reached a new record high in 2016, pushing past the £150bn barrier, [to] £154.4bn. This is despite a quiet year for new issue activity, with the volatile start to the year and Brexit jitters clearly playing a role,” says Jemma Jackson, PR manager at the AIC. 

“It was only three years ago that the sector posted a record £100bn assets under management, illustrating how much assets have grown in just a few years.”

The almost complete lack of IPO activity this year appears to be directly linked to the referendum and the resulting vote to leave.

Ms Jackson acknowledges: “While new issue activity has been slow in 2016, issuance activity in the secondary market has continued apace, and is not far behind where it was this time a year ago.”

Is IPO activity likely to pick up from here? James Glover, client director at JPMorgan Asset Management, says: “IPO activity is driven by market sentiment and as long as a market is slightly uncertain they [investors] will just sit on their hands. There are a lot of clients out there I’ve spoken to who are sitting on reasonable amounts of cash and don’t know quite where to put it and aren’t in a hurry to do anything with it.”

What is notable, Mr Glover observes, is the continuing hunt for yield, with alternatives proving particularly popular – an asset class to which the investment trust structure lends itself well. At the end of September 2016, the AIC Sector Specialist: Debt was the highest-yielding sector, with an average of 6.9 per cent, followed by Sector Specialist: Leasing with an average dividend of 6.1 per cent.

Mr Glover suggests investment trusts will be better placed than open-ended funds should the current environment for dividend-paying stocks worsen next year.

He explains: “If you had a slowdown in earnings growth or pressure to cut dividends in some of those big sectors, the investment trust industry would come into its own because it has got big reserves. It can use those reserves to smooth [gaps in] income.”

One of the biggest challenges the closed-ended industry has sought to overcome is a lack of understanding among advisers about the structure of investment trusts, in a bid to boost adviser sales of the vehicles.

Mr Glover says he has seen a significant increase in adviser purchases of trusts through platforms. This is backed by figures from the AIC showing adviser and wealth manager purchases of investment trusts via platforms reached £161m in the second quarter of 2016 – the second-highest quarter on record.

But there is still some way to go. Tristan Chapple, director of the Aurora Investment Trust, suggests the industry is still grappling with the role platforms play in providing liquidity and a market for the investment trust space. 

“It seems to be an issue. How do investment trusts maximise the opportunity afforded to them [by] appearing on the major platforms?” he asks.

The flexibility of investment trusts has helped these vehicles overcome challenges in the past and is likely to do so again in the future.

Ellie Duncan is deputy features editor at Investment Adviser