Talking PointApr 26 2018

Trust launches led by demand for alternatives

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Trust launches led by demand for alternatives

Four investment trusts have launched initial public offerings (IPOs) so far this year,  figures from the Association of Investment Companies (AIC) show, with the trade body citing demand from investors to access alternative assets through the closed-ended structure.

Marble Point Loan Financing, Augmentum Fintech, Baillie Gifford US Growth and JPMorgan Multi-Asset have all entered the market in 2018.

The number of new issues, where established companies list shares on the open market for the first time, set a record in 2017 when there were 15 IPOs, with alternative assets having dominated the list of new issues. 

A further three – Gore Street Energy Storage Fund, Odyssean Investment Trust and Fundamentum Social Housing Reit – have announced their intention to float in 2018, the AIC confirmed.

An intention to float from Global Diversified Infrastructure failed to meet the minimum fundraising and is no longer going ahead.

Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), said: “Investment companies investing in alternative asset classes have dominated the list of new issues over recent years.

“Also, 2017 was a strong year for IPOs, and secondary fundraising reached an all-time high. There was a total of 15 IPOs in 2017 and about three quarters of these were in alternatives.”

She continued: “The strong markets over recent years have provided a good environment for investment company IPOs, although markets have been more volatile this year.

“As markets play a role in investment company IPOs it’s impossible to predict what the total number of IPOs will be this year, but there is demand from investors to access alternative assets in particular through the closed-ended structure."

Alternatives have become more popular because income is in such demand, and bonds have been unpopular having reached the end of the bond bull market, according to Ryan Lightfoot-Brown, research analyst at FundCalibre. 

He said: “The pros are that many are inflation-linked, they offer diversification and they give investors access to parts of the market they would otherwise not be able to invest in – like wind and solar energy, and student accommodation, for example. 

“They also tend to benefit from very specialist management.”

He added: “The cons are that some fail to launch as there is only so much demand, there is some regulatory risk and, as bond yields start to rise, they may become less attractive over time. When there is high demand it is also important to note that prices can become very over-inflated.”

When considering what IPOs mean for investors and how advisers should approach them, Mr Lightfoot-Brown said they need to do a bit of research. 

He asked: “Do you know the manager and their process? Are they able to demonstrate how they would use the gearing? Is the trust a logical one for that manager and company? Is the board independent? 

“Depending on the trust you would want to know if the trust will be fully (or nearly fully) invested at launch, or whether monies will need to be invested over a period of time (if investing in real assets, for example) and, if there is a yield on offer, if there will be a time delay on when it will actually be paid.”

He pointed out: “It's also worth noting that there is no stamp duty to be paid on an IPO but also that some may not raise enough money and therefore will not launch at all.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, explained: “Where they get investment trust exposure, IFAs will normally do so through a managed service and so won’t have to keep up with the regular flow of equity issuance.”

So far in 2018, 14 investment trusts have announced changes to management fees.

“Over a third of investment companies have reduced fees since 2012 which demonstrates the value of independent boards of directors to shareholders,” said Ms Brodie-Smith.

Most recently, the BlackRock Smaller Companies investment trust dropped its management fee and abolished its performance fee, which had previously been based on 10 per cent of the annualised outperformance in the two previous financial years, applied to the average gross assets, capped at 0.25 per cent of average gross assets.

Jason Hollands, managing director, business development and communications at Tilney Group, observed: "Over several years now, boards have become more inclined to flex their muscles in fee discussions with managers and, in some cases, this has included reigning back on performance fee structures.

"However, the news that Invesco [Perpetual] has served termination notice on its contract to manage the relatively small Invesco Enhanced Income mandate – essentially firing the client – over a difference of views on fees, is a reminder that fund managers too have lines in the sand over what makes commercial sense for them."

Stephanie Spicer is a freelance journalist