Newly launched investment trusts are more likely to weather potential market headwinds unlike examples in the past, according to Charles Cade (pictured), head of investment company research at Numis. 
At times in the past, it has been recently launched trusts – which have usually come to market due to sheer demand from investors wanting exposure to new hot investment trend – that have been the first to be wound up as market conditions change.
The investment trust sector is often praised for its constituents’ longevity with some well-known ITs launched decades (and sometimes more than a hundred years ago) still performing strongly.
However, initial public offerings (IPOs) for popular investment trends have tended to come in waves with many newly launched trusts ending up closed, merged or wound-up. In fact, only about one in four of those launched between 2000 and 2009 (326) have survived in their original form.
One of the bigger trends in the space in recent years has been a spate of launches seeking to provide ‘alternative income’ exposure and 2015 in particular was a bumper year which saw many new portfolio names on the London market.
In the first three months of 2016, however, there has been the lowest number of investment trust launches since confidence tentatively returned to markets in early 2009 from the depths of bearishness induced by the financial crisis.
This was reflection of severe volatility in both equity and bond markets, says Cade, as well as a widening of many discounts, particularly among the nascent alternative income portfolios which raised significant amounts of capital in recent years.
“The lack of IPOs in 2016 to-date could be viewed as a sign that the current phase of alternative income IPOs has come to an end,” he said.
“In our view, however, there remains strong demand for funds that can deliver a predictable yield, as reflected by the number of secondary issues that are still taking place. There is inevitably a threat that the appeal of some mandates will wane once interest rates start to rise, as this is likely to lead to a shift in asset allocation by investors.”
Number of annual invesmtent trust IPOs since 2000
Source: Numis Securities
Furthermore, he says, investors have been wary of making asset allocation calls ahead of the Brexit vote in June 2016.
The last few years, and 2015 in particular, has seen a rush IPOs of alternative income investment trusts as investors have sought out an attractive yield at time of low interest rates.
“Capital typically invested in cash, gilts and corporate bonds has been shifted to other asset classes, favouring investments with a target return of 6-10 per cent per annum, combined with low volatility and a predictable yield,” Cade said.
This has mainly been in difficult areas to access via open-ended funds, such as senior loans, direct lending to consumers and small and medium sized enterprises such as through the £800m P2P Global Investments trust or via asset backed securities portfolios such as the £347m TwentyFour Income trust.
Performance of trusts over 1yr
Source: FE Analytics
“We believe that there is potential for around 15 IPOs per year [for investment trusts]… although we expect the number of IPOs in 2016 to be lower, with secondary share issuance accounting for the majority of capital raised,” Cade said.
“At the start of the year, there were press reports of a mid-market European corporate debt fund to be managed by Permira, as well as another P2P fund and a CLO origination vehicle. However, none of these vehicles appears to have moved beyond test marketing. In addition, the proposed launch of a £200m HealthCare Royalty Trust was recently shelved “in light of unfavourable market conditions”.
However, he says there is plenty of demand from wealth managers and investment banks who tend to back these portfolios at the stage of primary market listing and that lessons have been learned from previous years.
This includes more innovative and competitive fee structures, more discount controls and lower leverage.
“[Investment trusts] remain well placed to take advantage of the closed-end structure through dis-intermediation of the banking system - e.g. direct lending - or regulatory changes in the financial sector, as well as providing access to long-term asset classes that cannot easily be accessed by most investors, e.g. infrastructure, renewable energy and specialist property.”
“The major multi-asset investors appreciate the benefits of the closed-end structure in specialist asset classes.
Nonetheless, he thinks new launches are becoming less likely than secondary issuance from existing trusts as he says institutional investors now mostly opt for trusts of a certain size.
“They are wary of illiquidity and increasingly want vehicles to be at least £200m. This is often a “tall order” at IPO stage, particularly for funds investing in asset classes that are unfamiliar to most investors.”
“It is still very difficult to get the critical mass to raise more than £200m at IPO and larger issues will need to see a broadening of the investor base to include a greater diversity of institutional buyers.”
“The other key buyers of IPOs have been the private client stockbrokers, but these are also wary of investing in smaller issues, and it is often hard to get firm commitments of interest in advance due to the number of decision makers involved. This means that there is often little clarity over the size or success of a new launch until very late in the whole process.”
