A quarter of discretionary fund managers (DFMs) plan to increase their exposure to investment trusts over the next six months, primarily to take advantage of the attractive discounts currently on offer, according to a survey by Research in Finance.
Infrastructure is the most popular asset class, with 28% of wealth managers stating they intended to put more money into closed-ended funds investing in the asset class.
Other in-demand sectors were private equity (21%), global (20%), UK (20%) and property (19%), Research in Finance’s survey revealed.
Wealth managers overall have increased allocations to investment trusts to 14% as of the first quarter of 2023, up from 12% last year and 9% in the first three months of 2020.
Richard Ley, founding director at Research in Finance, said: “The current discount levels appear to have driven allocations to investment trusts upwards alongside a larger allocation to direct equities, which has been a result of the attraction of specific stocks.
“We also know that investment trusts’ ability to use gearing is considered a positive when the conviction is especially strong for an asset class, geography, or a specific trust.”
Among the DFMs who use investment trusts, 24% plan to add more in the next six months, 65% will continue with the status quo, while 11% expect to decrease their allocations.
The common theme among almost all (95%) was that they were buying to take advantage of attractive discounts, which have widened significantly this year.
Nick Britton, research director at the Association of Investment Companies (AIC), said: “History suggests that discounts at these levels don’t persist forever and that periods of negative sentiment towards investment trusts can prove to be a good time to invest for the long term.”
Indeed, Peter Walls, who manages the Unicorn Mastertrust, told Trustnet last month he was “almost dancing on the table with excitement because I can see value in discounted trusts.”
He has a large weighting towards listed private equity trusts in the UK and internationally, many of which have significant discounts, and he also favours UK smaller companies.
Apart from being cheap, more than a third of wealth managers (38%) said they were using investment trusts to take advantage of volatility, while more than a quarter (27%) liked their use of gearing, which allows companies to leverage up ahead of a market rebound.
Another 24% said they used closed-ended funds for exposure to niche asset classes, as the structure of investment companies is often cited as beneficial when buying illiquid assets, while some 30% were bullish due to the strong performance of certain trusts.
Conversely, wealth managers who plan to use investment trusts less said they were concerned about liquidity and wanted to reduce their exposure to illiquid asset classes. Some of them are moving money out of investment trusts and into passive funds.