Investment trusts springboard to a brave new world

With assets at a record high and demand increasing, investment companies are well placed to embrace the opportunities promised by the new pension rules next year


2014 has been a good year for the investment company industry with the industry’s assets currently at an all-time high of £118.7bn.  The average investment company is up 6 per cent over the year to 31 October and, although markets have generally not performed as strongly as last year, investment companies’ performance remains good in the context of the current low interest rate environment.

Discounts are still at a record low of 3 per cent at the end of October demonstrating the strong demand for investment companies, particularly those in the income sectors and the high yielding alternative assets like infrastructure, debt and property.

Demand for these sectors is also reflected in the fundraising figures for 2014. The biggest issue was the Kennedy Wilson European Real Estate company in the Property – Europe Direct which raised £910m in February and not surprisingly, including this launch, this sector has raised most money this year namely £1.4bn.

The sector that raised the second largest amount of money was the Sector Specialist; Debt which raised £967.7m and included the second and third biggest launches of the year, Blackstone/GSO Loan Financing and P2P Global Investments, the first UK listed company to invest in credit from peer to peer lending platforms. Other sectors which proved popular included: Infrastructure – Renewable Energy and Property Direct UK.

In terms of performance the year-to-date has very much favoured specialist sectors.  Strong performance has in particular come from India-focussed investment companies, with India Capital Growth up 48 per cent, New India up 47 per cent and JPMorgan Indian up 45 per cent, making them the top three performing companies.

The Sector Specialist: Biotechnology and Healthcare sector is the top performing sector year-to-date, continuing the strong performance of recent years (up 30 per cent), whilst Property Direct: UK, Property Direct: Asia Pacific and Sector Specialist: Infrastructure are all among he top performing sectors.

This year hardly a week has gone by without an investment company announcing a change to their management fee as investment company boards respond to charges on open-ended funds coming down post RDR.  In fact 10 per cent of investment companies have changed their fees to benefit their shareholders this year.

Some examples from well-known investment companies include Perpetual Income and Growth, managed by Mark Barnett, which has reduced its   management fee from 0.75 to 0.6 per cent on the first £500m of assets, and then 0.4 per cent on the rest of the assets (£1.08bn in total). Capital Gearing Trust, managed by the living legend Peter Spiller, has reduced its management fee from 0.8 to 0.6 per cent.

Investment companies have also continued to abolish their performance fees this year with Edinburgh Investment Trust both abolishing its performance fee and reducing its management fee to 0.55 per cent.

Management changes have also been on the agenda this year with six investment company boards changing their fund management group. These included F&C US Smaller Companies who decided to follow their fund manager, Robert Siddles, to Jupiter.  In addition, Mid Wynd International moved from Baillie Gifford following the retirement of their manager, Michael MacPhee to Artemis where it is managed by Simon Edelsten, Alex Illingworth and Rosanna Burcheri.

It is also important to emphasise on some high profile occasions this year the investment company boards, having reviewed the fund management group, have decided to stay with the same group.  This was the case for Edinburgh Investment Trust where the board decided to stay with Invesco and Mark Barnett took over as manager when Neil Woodford left.

Also Schroder UK Growth retained Schroders as management group after Julie Dean left in September 2014 after just over a year of managing the fund. Philip Matthews assumed responsibility for the portfolio and furthermore, the management fee was reduced from 0.6 to 0.5 per cent.

Perhaps one of the most exciting and unexpected opportunities for the industry was the announcement of the pension changes in the Budget. The AIC has welcomed the decision to allow pension savers freedom over how they take their pensions and draw an income in retirement.

The AIC’s ‘’Freedom in pensions’ series has looked at how investment companies can be used to build a long-term pension portfolio and to deliver a higher or growing income in retirement. We have also seen a board act on these pension changes with British Assets, a company previously managed by F&C Investments, announcing its intention to appoint BlackRock as the new management group and to adopt a multi-asset approach, with an income focus and the aim of preserving capital to appeal to retirees.

It is interesting to see that Winterflood believe British Assets’ proposals “mark an important inflection point in the evolution of investment trusts and the sector’s attempts to meet changing investment needs.”

Undoubtedly RDR has had an influence on demand for the sector this year with adviser purchases in the 12 months up to the end of June more than doubling from the pre RDR period.  In addition, direct investors are increasingly coming to the sector via direct platforms. It remains to seen whether the brave new pensions world can provide a similar opportunity for investment companies in 2015 and beyond.