Investment company discounts hit record lows last year, but Numis Securities thinks the sector could be at risk of a valuation slide.
According to the Numis Securities Investment Companies Annual Review, the sector raised almost £8bn last year, more than the previous two years combined.
That included £3.5bn from 20 IPOs, with most new investment companies aimed at alternatives such as infrastructure, renewables and specialist debt.
However, it is possible that the sector will weaken as it has after past booms on new issuance.
“It’s dangerous to bet against history. The surge in IPO activity has been driven by investors searching for alternative sources of yield, given the low returns of cash, gilts and investment grade bonds,” Numis researchers say.
“In the near term, we believe that the themes currently in place are likely to remain strong, with investors continuing to search for alternative sources of income,”.
But “value is scarce” with premiums for some infrastructure and UK property funds “excessive”,
The average discount for alternative asset funds tightened to 2.8 per cent in December, compared with 13 per cent at the start of the year.
A quarter of all investment companies are trading at a premium, while Association of Investment Companies figures show the overall average discount shrank to 3.4 per cent last year, the lowest since 1970 when records began.
The AIC says the news is the result of strong performance, dividends and the impact of RDR on the sector.
However, the Numis researchers warn the high valuations could lead to trouble further down the road.
“Historic evidence suggests that high premiums are unsustainable, which implies that investors buying stocks on high premiums will endure disappointing results over the medium term,” they say.
“A new era” of investment company valuations is premature, and investors should focus on management quality, the structure and liquidity of funds before buying in, Numis says.