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Can we trust small portfolios?

26 May 2023

A lot of consolidation among investment trusts may put smaller portfolios in the spotlight.

By Jonathan Jones,

Editor, Trustnet

One of the benefits of buying a new fund is the ability to back a new manager trying to gain their track record. But what happens when the portfolio fails to draw in enough money?

A report from Winterflood Securities this week highlighting the growing issues facing many investment trusts caught my eye. It stated that more than 25 companies face continuation votes for the remainder of 2023, while some have already decided to wind up, such as abrdn Latin American Income.

There is a range of options to boards that undertake strategic reviews on funds that have struggled to take in enough cash. Some may choose small changes, such as Schroders Capital Global Innovation Trust, where the board widened the investment remit.

Harder options include mergers, such as has been mooted by Ediston Property Investment Company, or a full-scale wind-up.

So why are there more strategic reviews, and what is the spotlight on these trusts now? Elliott Hardy, research analyst at Winterflood, blamed the macroeconomic environment.

“The investment landscape has shifted dramatically over the past 18 months. The outbreak of war in Ukraine, among other catalysts, brought inflationary pressures which forced central banks to change tack from their near-decade stance of ultra-low base rates,” he said.

“The read across for the investment trust universe, aside from the direct impacts of an increase in discount rates, has been heightened scrutiny on where capital gets allocated.”

This, combined with rife M&A throughout the investment management industry, has placed more emphasis on offerings to prove their worth.

Indeed, in the firm’s 2023 industry survey, the proportion of investors willing to back smaller trusts with less than £150m in assets under management had plummeted from 95% in 2013 to just 63% today. The same is true of institutional investors, who typically have even higher thresholds.

It is hard to know if a fund is ‘sub-scale’ or just small by design and a fund’s size is a somewhat “blunt” way to measure this. A good marker to watch is the diversity of the shareholder register – the more investors, the easier shares are likely to be to trade.

The firm highlighted 14 funds that could be sub-scale, using three factors: a market capitalisation below £200m, a five-year average discount that has been wider than peers and a five-year period of below-average net asset value (NAV) returns.

These included equity portfolios Jupiter Green InvestmentKeystone Positive Change and River & Mercantile UK Micro Cap as well as alternatives Premier Miton Global Renewables and Triple Point Energy Transition, among others.

So should you sell? There is no right answer. Not all of these funds will make changes and some have had rough patches that they could come through – and have proven capable in the past.

If you have done the due diligence to invest in them, and as long as nothing has changed, then there is little reason to shift. And there is always a chance that the discount narrows.

However, for new investors, there is no need to invest in small trusts unless they are in area that cannot be accessed elsewhere through larger vehicles. The risks do not seem worth it for general equity trusts, in my opinion.

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