Shortly after Fund Strategy’s launch in October 2000 the problems with split-capital trusts came to light. This was an incredibly difficult time for the industry, as around 40 split capital investment companies were liquidated due to an overly geared and complicated structure, where some of the companies invested in each other.
In May 2002, the FSA launched an investigation into the split capital crisis and at the end of 2002 total industry assets had dropped to £47.8bn, down from £78.9bn at the end of 1999. In 2005 compensation of £144m was paid to split capital trust investors. The rest of the industry, the conventional investment companies, had during this period continued to produce good long-term returns for their shareholders.
It’s heartening that the industry has rebounded, with an investment in the average investment company at the end of October 2000, prior to the tech bust gaining full momentum, now up 257 per cent. This performance demonstrates the value of investing for the long term. The industry is thriving, with assets close to an all-time high of £164bn and the average discount close to a 10-year low of 2.7 per cent. The clear income advantages of investment companies have come to the fore and their suitability for illiquid assets means that around half of the sector is now invested in alternative assets like property, infrastructure and debt.
The income advantages of investment companies have stimulated demand in the low interest rate environment since the financial crisis. Their advantages include their ability to smooth dividends when times are tough, using revenue reserves to boost their dividends. The dividend heroes, the 20 investment companies with at least a 20-year record of increasing dividends each year, have come to prominence. There are now four companies with a 50-year record of dividend increases – City of London, Bankers, Alliance Trust and Caledonia.
Another income benefit of investment companies is they can pay income out of capital profits, which helps meet shareholder demand for income. This can potentially lead to investment companies being rerated to trade on lower discounts, another benefit for shareholders. We have recently seen a small but increasing number of companies paying income out of capital. Investment company boards have an important role to play overseeing any change in dividend policy and ensuring it is in shareholders’ best interests.
The ability to invest in a wide range of assets including illiquid assets, which can offer a higher level of income, has been a key driver of growth for the investment company industry. In 2006, 73 per cent of the investment company industry was invested in equities whereas at the end of 2016, just 52 per cent was invested in equities, with private equity, direct property, infrastructure and debt featuring prominently.
The infrastructure sector is a good example as the first infrastructure company, HICL Infrastructure, launched in March 2006 at £250m and is now the eighth largest investment company with total assets of £2.45bn. The infrastructure sector has grown from strength to strength and is now the fourth largest investment company sector.
Next year is the 150th birthday of the first investment company, Foreign & Colonial Investment trust which was launched in March 1868. The investment company sector has weathered two world wars, the great depression, the tech bust and the financial crisis, so it fills me with confidence for whatever the future brings.
Annabel Brodie-Smith, communications director, AIC