Nevertheless, cautious optimism seems to be the order of the day in the investment company sector, according to figures from the Association of Investment Companies (AIC). A number of managers have been steadily reducing their exposure to cash and fixed interest since the year end and are apparently taking advantage of buying opportunities. Over half (56%) of AIC Members reduced their exposure to cash and fixed interest in the first five months of 2009, suggesting creeping optimism in the sector.
Those with the greatest decreases in their exposure to cash and fixed interest included sectors which have been hardest hit by the financial crisis – namely Property Securities, Sector Specialist: Financials and Global Emerging Markets. However, the Global Growth, the Global Growth and Income, and the UK Growth sectors have also, on average, reduced their exposure to cash and fixed interest.
Cash vs. other sectors
Commenting on the reduced exposure to cash and fixed interest, Shaun Miskell, investment analyst at Blue Planet Investment Advisers said: "Given that the credit cycle is now entering an expansionary phase, we see clear opportunities in financial stocks going forward, and have therefore allocated more into these financial stocks in recent months."
"It is clear that the market has failed to distinguish between bad banks that have run up huge losses, and quality, well managed banks with positive earnings growth, and it is these quality, yet grossly oversold, stocks that we have invested in. We remain wary of the UK and the US, given the indebtedness of the consumer, leverage within the banking system, and worrying fiscal positions, and instead we seek out opportunities within economies with positive real GDP growth, less leverage, and a banking system with scope to increase profits in the coming years.”
Interestingly, Brian O’Neil, manager of Gartmore Global Trust and one of the longest serving managers in the sector - he has managed Gartmore Global since 1983 - took his cash position as high as 18 per cent of assets last year, and commenting recently he argued that: "I’ve been in the business long enough to know a bubble when I see one."
Whilst he is not taking a strong view on the market at the moment, he does believe that we have seen the bottom and his cash position reflects this, namely 8 per cent of assets at the end of May. Either way, it is clear that a number of investment company managers have been taking advantage of investment opportunities since the beginning of the year.
Whilst markets paused for breath in June, investment company discounts have narrowed considerably since the end of 2008. Discounts on average have narrowed from the high teens (18 per cent) at the end of December 2008 to 12 per cent at end June 2009. Some of these have been dramatic, for example the Sector Specialist: Infrastructure sector has gone from a 22 per cent discount at end December 2008 to 9 per cent at end June 2009, perhaps reflecting a renewed interest in defensives. Discounts in the Hedge Funds sector have narrowed similarly, from an average of 26 per cent at the end of December 2008 to 16 per cent at the end of June 2009, whilst the Japan sectors and a number of the Asian sectors have seen marked discount narrowing over the last 6 months.
We are also starting to see signs of activity once again when it comes to companies raising new money. For example Ecofin Water & Power Opportunities Trust, a Sector Specialist: Utilities investment company has recently received commitments for the placing of £140million in a mixture of convertible unsecured loan stock (£80m) and zero dividend preference shares (£60m). BlackRock Latin American recently announced a possible issuance of up to $75m of convertible bonds with a six-year life and a 3.5 per cent coupon.
Certainly those managers who have reduced their exposure to cash and fixed interest this year will have taken advantage of prices that will have been at their lowest for some time, just as those who bought when discounts were wide may be feeling vindicated at time of writing. Let’s hope they prove to be vintage investments over the long-term, whatever becomes of the ‘sell in May’ adage this year.
Annabel Brodie-Smith is Communications Director at the Association of Investment Companies (AIC). The views expressed here are her own.