Investment Trusts  

Investors plump for trusts to hold illiquid assets

Investors plump for trusts to hold illiquid assets

British investors are pouring cash into closed-end investment vehicles, particularly when it comes to investing in illiquid assets such as property.

Data compiled by research firm Cerulli Associates showed that the value of closed-end funds had jumped by 16 per cent over the past four years.

Closed-end vehicles work well for asset classes such as infrastructure, private equity and property because the trust manager does not have to maintain a high level of liquidity for investors.

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These findings come as the Financial Conduct Authority is looking to review the fund industry to try to address illiquidity issues in open-ended funds.

This long-awaited consultation came in response to the string of property fund suspensions last summer, as the fund groups struggled with the surge of redemption requests after the Brexit vote.

Barbara Wall, managing director for Cerulli's European division, said: "A major attraction of closed-end funds is their structure, incorporating a permanent pool of capital not affected by day-to-day fluctuations in investor demand.

"It is not necessary to include different asset classes in a closed-end fund; it is essentially just a wrapper listed on an exchange that allows for investment in a range of underlying assets."

While closed-ended funds account for a small percentage of non-money market investment assets in Europe, the net asset value of investment trusts in the UK jumped by two-thirds between 2012 and mid-December last year.

The NAV stood at £145bn in December, from the £87bn posted back in 2012.

Investment trusts allocated to fixed income and property have both more than doubled in value over the period reviewed, hitting £6bn and £11bn respectively.

Meanwhile, equity investment increased steadily to £85bn from £55bn over the four years. 

Cerulli also found there has been an increase in the volume of retail investors allocating to investment trusts through execution-only platforms.

But Alan Steel, director of West Lothian-based Alan Steel Asset Management, was critical of people piling into illiquid assets, regardless of whether they are held in a closed or open-end vehicle.

He disputed the consensus view that we are now heading for a bear market, adding: “If we are heading for a bear market, wouldn’t the pessimism spread into other areas like property?”

“We saw last year what happens when too many try to sell property funds.”

While Mr Steel said investors should “in theory” use closed-end funds for illiquid assets, he added: “Even investment trusts could have problems meeting redemptions, and personally I’d just keep well clear [of illiquid assets altogether]. 

“I remember the property panics of the 1970s and the ‘you can’t go wrong with property’ cult between 2005 and 2007. It’s a no from me; it doesn’t matter the product.”

katherine.denham@ft.com