This could be a boost for investors; the constant rationalisation of investment trust sectors and their ability to be reinvented is a strength, said investment trust analyst Simon Elliott.
"So far in 2010, there have been 12 IPOs, while nine investment companies have disappeared. In addition, £1.14bn of capital has been returned through buybacks and tenders. This trend shows no signs of reversing," he said in a monthly update.
Performance of IT Private Equity, UK Smaller Companies and Hedge Fund sectors over 1-yr
Source: Financial Express Analytics
Given this backdrop, it is difficult to justify funds of hedge funds in a listed closed-ended fund structure except for those pursuing more specialist strategies, the note said. Meanwhile, the UK Small Cap sector has seen a lot of contraction over the last five years. Including mid cap and fledgling funds, the subsector has shrunk from 26 to 16, which includes two funds that are winding down or will shortly be delisted, according to Winterflood.
"Although the remaining funds are well managed, further contraction cannot be ruled out," Elliott added.
The note points out that two private equity trusts, Candover Investments and Henderson Private Equity, announced plans in the past month to realise profits by selling assets, while Framlington Innovative Growth went into liquidation, triggered by an over-subscribed tender offer.
"A number of hedge funds continue to return capital as part of their managed wind-downs, including Gottex Market Neutral and FRM Diversified Alpha, while Castle Asia Alternative announced a continuation vote for June next year," the update pointed out.
Despite these developments, the analysts at Winterflood do not anticipate that a wave of private equity funds will adopt a run-off strategy.
Elliott said: "In our view, wide discounts across the sector reflect the asset class's susceptibility to possible further economic downturn. We remain positive on the prospects for the listed private equity sector, although mindful of the risks. In our opinion, current valuations offer an opportunity for investors who can take a longer term view."
Meanwhile, the note pointed out that the entire investment trust sector underperformed the rest of the market in August – for its second month in a row. It also said very few investment trusts were affected in the latest FTSE quarterly review, although JPM Global Emerging Markets Income, Polar Capital Global Healthcare Growth & Income, and Ruffer Investment Company went into the All Share, while Real Estate Opportunities was relegated.