Investment trust boom in wake of Woodford liquidity concerns
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Investors’ appetite for income in a dwindling market for dividends has prompted a surge in investment trust launches, with five new potential funds announced in recent weeks.
After a quiet year so far for trust launches, with only one new trust floated in February, several were recently announced as fund managers seek to take advantage of low prices for stakes in smaller UK companies while investors are still willing to turn out their pockets for shares.
Launches include the Schroder Business Opportunities trust, which is seeking £250m to invest in both public and private small and mid-cap UK companies, the Tellworth British Recovery & Growth which is raising £100m, and the Sanford DeLand UK Buffettology Smaller Companies trust. The Home real estate investment trust (Reit) is raising £250m to invest in accommodation for the homeless.
As the pandemic has hit valuations of smaller UK companies, investors are looking to pick up good value, said Ryan Hughes, head of active portfolios at investment platform AJ Bell. But they are mindful of the lessons from the collapse of Neil Woodford’s flagship fund, adding: “They are much more mindful of liquidity, and the risks that come with it.”
Investment trusts are publicly traded, closed-ended funds that trade at a discount or premium to the book value of their underlying assets. Trusts are popular with income investors for their ability to use cash reserves to smooth dividend payouts and provide a reliable income stream. Their closed-ended structure allows trusts means they can hold illiquid assets and unlisted companies without fear of a sell-off.
Income-starved retail investors turned to trusts in the wake of the pandemic sell-off, when a record number of UK companies announced cuts or cancellations of their dividends, and they continue to be among the top buys on retail investment platforms.
The trust model is much loved by fund managers looking to invest without the risk of an investor sell-off if performance wanes and allows them more flexibility to invest in unlisted or illiquid companies.
The spate of trust launches comes amid a long-term decline in value investing — when investors seek out companies they believe are undervalued by the market. Several funds have removed their value-style asset managers for underperformance. The prominent value investor Mark Barnett, protégé of fallen star manager Mr Woodford, was fired from Invesco this year. Jupiter UK Growth trust is set to be wound up due to declining asset values, which had fallen to £26m, it emerged this week.
Mr Hughes said the trust launches were a sign that managers had learnt from the Woodford scandal, opting for closed vehicles instead of open-ended funds and using trusts for small and mid-cap companies. “As people think more about the right investment vehicle for illiquid assets, it is certainly plausible to think there will be more trusts going forward.”
But trusts require a critical mass of funding to be successful. Analysts warned that the latest launches, which will have a similar focus, would compete for the same type of investor capital and may struggle to raise enough to get off the ground.
“It’s quite unlikely an investor will pick all three, but instead pick one,” said Monica Tepes, investment company research director at FinnCap. Analysts said the market would be watching these launches closely to see if the appetite for investing in smaller companies had returned. “It will be interesting to see if there will be a revival of equity investing in closed-ended funds, instead of just investing for income.”
The Buffettology Smaller Companies Investment Trust, managed by Keith Ashworth-Lord, is seeking to raise at least £100m for a trust to invest in companies with a market cap smaller than £500m.
Mr Ashworth-Lord, chief investment officer of Sanford DeLand Asset Management, said: “The structure of a closed-ended investment trust, rather than an open-ended fund, means that many of the liquidity concerns over investment in smaller quoted companies can be addressed.”
Simon Elliott, an analyst at Winterflood Securities, said that the trust fundraising boom could be driven by fund managers seeking to make up for lost time during a period of relative calm in the markets. “It would not be a surprise to see a number postpone their launches until next year, particularly if market volatility increases,” he said.
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