A severe lack of liquidity in the investment trust universe is making a huge bulk of the market “uninvestable” for fund managers, according to MAM’s James Sullivan (pictured).

Sullivan, an FE Alpha Manager who co-runs the top-rated CF Miton Special Situations Portfolio with Martin Gray, says he is a big fan of closed-ended vehicles and prefers them to their open-ended counterparts in certain areas. 

However, he has been left frustrated by their illiquidity, which he believes is a huge barrier to entry for multi-managers. 

"The liquidity in investment trusts simply isn’t what it used to be," said Sullivan, who also runs CF Miton Strategic Portfolio and CF Miton Arcturus. 

"Trading volumes are badly depressed. Market sentiment was hurt badly when discounts widened so dramatically and it hasn’t yet returned." 

"A lot of the market-makers have shrunk their books, which hasn’t helped matters either."

"We would like to invest in them – particularly those invested in illiquid areas like bricks and mortar, but right now the sector is on its knees." 

Sullivan says anything under £100m is "uninvestable" for his multi-manager funds, and that only funds with more than £250m would warrant careful consideration.

This eliminates a number of top-rated portfolios, such as Acorn Income IT, which has just £23m assets under management (AUM), as well as the five crown-rated £82.5m Aberdeen New Thai IT, which is the best-performing closed-ended fund of the last decade, with returns of 950.12 per cent. 

"This isn’t a big problem for the man on the street who is making smaller trades and is therefore able to get his money out far more easily," Sullivan continued. "However, it’s very difficult for those with bigger mandates." 

"This is why you don’t see the Jupiter Merlin funds holding trusts anymore – not because they’re not any good, but because the liquidity isn’t up to scratch."

"You see a lot of trusts in the tail of Neil Woodford’s portfolios because they make very good investments, but not at the top end," he added. 

Sullivan says the $445m NB Distressed Debt Investment trust, headed up by Michael Holmberg and Patrick Flyn, is one of the few that he and Gray hold in their portfolios. 

The MAM pair have also traded in and out of Anthony Bolton’s Fidelity China Special Situations trust since it was launched in April 2010. 

Sullivan says the matter is not helped by the huge number of small, underperforming trusts that are doing little to address their widening discounts.

He commented: "There are too many issues coming out that are sub-par. I’d like to see more M&A activity, so that some of the dead wood can be cleared out." 

He points to Troy Asset Management as one of the few firms that is looking to actively expand in order to improve liquidity.

"The Troy Income & Growth Trust took over a couple of portfolios earlier this year [Albany Investment Trust and Grampian Investment Trust]. Unfortunately, we’re not seeing enough of this though," Sullivan explained. 

Poor liquidity is likely to be a particular problem for funds of investment trusts, such as Jupiter Fund of Investment Trusts, M&G Fund of Investment Trust and the Unicorn Mastertrust.

FE Alpha Manager Peter Walls, who heads up the Unicorn portfolio, accepts there is a problem with liquidity, but says this is not exclusive to investment trusts. 

"There is generally a liquidity problem because trading volumes are so low," he commented.

"We’ve now had four years of political instability, and so many financial institutions have found it difficult to operate as they once did."

"There has been a reduction in turnover across the board, not just investment trusts. Trusts do have the ability to increase their liquidity through new issuance and share buy-backs, and it will probably be these that will be the most successful post-RDR." 

For long-term investors, Walls sees no problem with holding a sub-£100m trust. 

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"Investment trusts are in general viewed as long-term investments – I’m not convinced there are too many investors who have made money from aggressively trading them," he said.

"We hold them on a three- to five-year view at the very least and would assume that liquidity will have improved by the time we sell once political uncertainty improves." 

Walls’ five crown-rated Unicorn Mastertrust is a top-decile performer in its IMA Flexible Investment sector over the last decade, with returns of 170.36 per cent. It is also top quartile over three and five years. 

Sullivan has a stellar record since he started running portfolios at MAM, delivering 20.73 per cent compared with just 3.62 per cent from his peer group composite.

He has also been significantly less volatile and was one of the very few to have posted a positive return in 2008. 

Performance of manager vs peer group since June 2008

 

Source: FE Analytics

Since Sullivan joined the team as deputy manager, both the CF Miton Special Situations Portfolio and CF Miton Strategic Portfolio are top quartile performers in their IMA Flexible Investment sector, delivering 19.18 and 22 per cent respectively. 

He started co-managing the CF Miton Arcturus portfolio, which sits in the IMA Absolute Return sector, in December 2009.

Since then, it has returned 7.8 per cent – more than its sector average, but a touch less than its Libor 3m plus 3% benchmark, which is up 11.33 per cent. 

All three are funds of funds, have a minimum investment of £1,000 and a total expense ratio (TER) of between 1.73 and 2.13 per cent.