Friday Highlight  

Closed-ended funds work for illiquid assets

Hold substantial cash balances with the resultant drag on performance?

Or suspend selling requests completely, thereby denying investors access to their cash?

As we have seen in recent months, the latter option is not received warmly by investors and raises yet more issues of its own. 

Closed-ended investment companies

This is where the benefits of listed closed ended investment companies – including investment trusts – really stand out.

The closed-ended structure means investment companies provide daily liquidity at all times to their shareholders through a live price on the London Stock Exchange, in the same way as any listed share.

Investment managers in closed-ended funds are encouraged to focus on running a long-term portfolio to secure superior returns rather than the provision of short-term liquidity, and performance does not suffer because of a manager’s over-zealous cash buffer.

Investors are also able to obtain access to a wide range of investment asset classes without the fear of being unable to access their cash.

Sectors such as student residential accommodation, real estate and infrastructure debt are far more accessible via a closed-ended structure, with the assurance that your money is being put to work by investing, rather than being held in cash on the chance redemptions are made.

For income investors, accessing more esoteric asset classes via an investment trust can also be a more secure way to ensure a stream of dependable, long-term returns.

Trusts are able to accrue revenue reserves of up to 15 per cent of the portfolio income every year which helps preserve cash reserves.

It means that dividend payments can be maintained, and even grown, year-on-year even where there are dividend cuts in the underlying portfolio holdings.

Trusts can also make use of borrowings to boost income returns for investors.

The Oeic structure may have been held up as the ‘best’ and most easy-to-comprehend form of collective investing, with its popularity far outstripping the closed-ended space in terms of available products, but it faces big limitations when it comes to esoteric asset classes.

However, the tide may be turning with the number of investment companies entering the alternative space booming in recent years.

According to the Association of Investment Companies, the amount of money held in trusts specialising in alternatives has increased by 92 per cent since 2014, with assets growing from £39.5bn to £75.9bn in 2019.

This is a positive development, driven by the demand for the sector from investors, and bolstered by the knowledge that they are the most suitable structure in which to hold a portfolio of illiquid assets. 

Nick Barker is a director and co-lead manager at GCP Student