IT issuance to recover from 2016 slump

Figures from the Association of Investment Companies (AIC) show there were 19 new issues in 2015, but this dropped to just four in 2016. The sharp drop-off could be blamed on market volatility in the wake of the EU referendum result and Donald Trump’s election in the US, but with the market facing similar uncertainty this year, could there be a repeat performance?

Annabel Brodie-Smith, AIC communications director, says: “Investment company fundraising reflects investor confidence in the market, so with the tough markets at the beginning of 2016 and [then]the uncertainty surrounding the Brexit vote and the US election, only four investment companies were launched last year. 

“This year we’ve already seen two new launches, which reflect strong confidence with markets reaching an all-time high. It’s very hard to predict future fundraising as so much depends on investor sentiment. Clearly the market is flying high, but as always there are potential threats ahead, including two European elections.”

 Investor sentiment among the buyers of investment trusts is extremely cautious, so being persuaded to take a risk on a new offering will be difficult Peter Hewitt, F&C Managed Portfolio Trust

Simon White, head of investment trusts at BlackRock, agrees that the challenging background for new issuance last year reflected investor nervousness about the economic and political uncertainty. 

He says: “Back then it looked as though the Chinese economy might struggle, while the EU referendum in the UK and the US presidential election provided further reasons to wait and hold back. In the end, China eased credit conditions and successfully reflated, and the results of the referendum and US election did not derail markets as many expected.

“While many political uncertainties remain – not least the string of elections in Europe – it is quite possible that the environment will improve this year. In our own stable, for instance, the BlackRock Frontiers Investment Trust has been issuing shares in a meaningful way in recent weeks, despite a relatively cautious reception to a C-share [issue] last year.”

Simon Crinage, head of investment trusts at JPMorgan Asset Management, points out that in the first two months of 2017 approximately £750m has been raised, “which represents more than a 90 per cent increase over the same period last year”. He adds that there are a number of launches and fundraisings “in the pipeline”. 

But Peter Hewitt, manager of the F&C Managed Portfolio Trust, says that the macro situation is likely to become more adverse as the year unfolds. 

He points out that while the economy “should be fine”, uncertainty over the nature of Brexit might undermine financial markets and sterling. 

“Confidence, which is already in short supply, could evaporate. Investor sentiment among the buyers of investment trusts is extremely cautious, so being persuaded to take a risk on a new offering – especially an equity trust – will be difficult,” Mr Hewitt says.

Colin Hughes, assistant fund manager of the Henderson Opportunities Trust, adds: “The chilling effect of the Brexit vote noticeably cooled companies’ enthusiasm to list on the stockmarket at the end of last year, with IPO [initial public offering] activity failing to reheat, even as market conditions settled. However, momentum now appears to be returning as London looks set to benefit from numerous flotations in the coming months.”

Mr Hewitt notes that typically only IPOs with a really strong story will make it to market and often, despite the overall environment, these are the ones worth investing in. “Expect income and alternatives to continue to dominate IPOs and C-shares. There is still a massive appetite for yield,” he says.

Mr White agrees that for potential IPOs there will continue to be a focus on income and alternatives. “Those who are already established in each particular alternatives subsector are at a huge advantage,” he says. 

“Investors prefer to back these main contenders – which are known for their liquidity –in each category rather than take the risk on the launch of an unproven newcomer.”

With prime minister Theresa May triggering Article 50 to formally begin the UK’s exit process from the EU this week, the future remains anything but certain, and any changes in investor sentiment could determine the success or otherwise of new entrants into the investment trust space.

Nyree Stewart is features editor at Investment Adviser