What is fuelling investment trust asset boom?

Brodie-Smith-Annabel-CUTOUT

Investment companies have been popular this year. This is demonstrated by the record net fundraising figures of £4.7bn until mid-October, higher than every previous calendar year.

There’s been a steady stream of new issues and existing investment companies have been issuing shares too. Much of this has been generated by demand for income from specialist high yielding sectors such as infrastructure and debt but this is not the full story.

The market volatility over the summer has led to discounts coming out to 3.6 per cent but this is not too far from the all-time low of 2.4 per cent at the end of June, indicating there is still demand. Of course, the other important component of the record net fund raising this year is the relatively small amount of money leaving the investment company sector at £1.5bn so far this year. Let’s take a closer look at what’s been going on.

Why is it a record year for net money raised? Well £6.2bn entered the sector through new issues and existing companies issuing shares. The biggest and most high-profile launch was Woodford Patient Capital, which raised £800m, the largest UK domiciled investment company IPO ever. There has also been a lot of demand for the company since its launch so the board have issued an additional £35m of shares.

Not surprisingly, the UK All Companies sector, which includes Woodford Patient Capital, was the most popular sector this quarter, according to data from Matrix Solutions. The sector accounted for 19 per cent of purchases, compared to 6 per cent in the first quarter of 2015. However, investment company purchases by advisers rose in the majority of investment company sectors.

The second and third most popular sectors with advisers were the Global and UK Equity Income sectors accounting for 16 per cent and 10 per cent of shares respectively, compared to 16 per cent and 13 per cent in Q1 2015. This ties in with the share issuance trends as many long-established investment companies in these sectors have been issuing shares.

These include Finsbury Growth & Income and City of London from the UK Equity Income sector. Other investment companies, such as Scottish Mortgage and Witan from the global sector, have also been steadily raising money.

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However, most of the money raised this year has been in alternative asset classes, such as specialist debt and infrastructure. These types of assets are illiquid and so are suited to the closed-ended structure of investment companies. The majority generate income in the mid to high single digits, which contributes to their popularity. They are also highly rated by the market, with the infrastructure sector trading at a 10 per cent premium, the property direct UK sector trading at a 5 per cent premium and the sector specialist debt sector trading close to asset value.

These sectors have remained popular with advisers with the property direct UK sector accounting for 9 per cent of purchases and the infrastructure sector accounting for 5 per cent of purchases, making them the fourth and fifth most favoured sectors by advisers in the second quarter.

Big new issues in alternative assets this year include UK Mortgages by TwentyFour Asset Management at £250m, private equity investment company Apax Global Alpha at £218m and Phoenix Spree Deutschland in the Property Direct Europe sector, which raised £157m.

Within the AIC’s sector specialist debt sector, investment companies investing in peer-to-peer lending have proved particularly popular. P2P Global investments raised £650m through two C-share issues this year and the new issue, VPC Speciality Lending Investments raised £200m in March and has raised £183m through a C-share in October.

Of course, it’s worth remembering that popular investment sectors can swiftly fall out of favour. As ever advisers need to take a long-term view and have a balanced, diversified portfolio, to prepare for times ahead.

Record net fundraising levels and discounts remaining relatively narrow indicate that demand for the investment company sector remains strong. Ultimately we’ll have to wait and see what future markets and interest rate decisions have in store but there are currently plenty of reasons to remain optimistic about the sector.

Annabel Brodie-Smith is communications director at the Association of Investment Companies.