Why did Liontrust's ESG investment trust flop?

Why did Liontrust's ESG investment trust flop?

The announcement from Liontrust that it has been forced to abandon its planned launch of an environmental, social and governance-focused investment trust was the latest in a line of failed launches from other providers. It also raises questions about the true level of demand for ESG products. 

The stock exchange announcement confirming that the Liontrust ESG trust would not happen due to the inability to raise the £100m target implied demand was strong from private investors, of whom 2,000 expressed an interest, but weak from the wealth management community. 

Similarly, the Tellworth British Recovery & Growth and the SDL UK Buffettology Smaller Companies trust launches were scrapped over the past year due to insufficient client demand, while a trust launch from Schroders in 2020 (Schroder British Opportunities) raised only its minimum target of £75m. 

Mick Gilligan, head of managed portfolios services at Killik and Co, says consolidation in the wealth management sector in recent years has made it harder for smaller trusts to launch.

This is because as wealth management companies combine, the amounts of money managed by each business rises, and that by each individual wealth manager. 

As investment trusts are listed on a stock exchange, substantial flows in and out can have a material impact on the share price at which a trust trades. If a wealth manager needs to sell a chunk of shares for some clients, this could be enough to drive the share price down, forcing losses on the clients that remain invested. 

Conversely, a wealth manager may decide a trust is a good investment for a group of clients at a particular share price, but if the trust is relatively small, the act of buying the shares in the trust for the first group of clients is likely to push the share price higher for later clients, even if they are in the same portfolios. 

Only trusts of a substantial size are likely to be able to provide sufficient liquidity to enable the manager of a substantial pool of assets to buy and sell in sufficient quantities, according to Gilligan.

Most trusts seek to raise a fixed amount at launch, with the intention of meeting future client demand with secondary fundraising in future. 

Data from the Association of Investment Companies shows £6.3bn of new money has been raised by investment trusts in 2021 year to date, with £5.1bn of this being existing investment trusts raising new money. 

Gilligan says the minimum level an investment trust needs to raise at launch now to be viable is probably £100m, having in the past been closer to £50m. 

Liquidity concerns 

Jason Hollands, managing director for corporate affairs at wealth manager Tilney, says: “Discretionary managers and other quasi-institutional investors are mindful of liquidity when investing in listed investment companies. No one wants to end up with a huge position in a small, thinly traded investment company that you can’t easily get out of.

"As the highly fragmented UK wealth management sector continues to consolidate, this concern about liquidity isn’t going to go away and portfolio managers also have a lot more options now with the growth of ETFs and availability of smart beta and factor funds to add to the mix.”