After seeing in the new year; some investors will already have, or be planning to, read some year-ahead investment outlooks, as they prepare their portfolios for a spring clean.
Of course, unlike the Earth’s orbit around the sun, the stock market does not move in annual cycles, so a great dollop of salt will have to be taken along with them.
Perhaps the most accurate year-ahead prediction ever given apparently came over 100 years ago. When the banker John Pierpoint Morgan was asked what the stock market would do, he replied that “it will fluctuate”. Astute, indeed.
The Kepler office participates in an annual investment trust tipping competition, yet making serious predictions for the year ahead is fraught with danger – as my investment portfolio can attest to.
Still, when it comes to the year ahead (and beyond), we see silver linings on the horizon for trusts signalling brighter times and the potential for discounts to narrow.
Stock markets are, of course, riding high on the back of hope that artificial intelligence (AI) will herald the next industrial revolution; inflation seems to be finding its new normal; and interest rates are expected to fall further. These factors should continue to be constructive.
Yet there is a bigger potential coup for investment trusts that we hope will have a positive impact by encouraging larger investors to take more of an interest. That is the issue of cost disclosure. The Financial Conduct Authority (FCA) finally came up with a different approach to the presentation of costs for investment trusts.
Previously, investment trusts have been forced to calculate all-encompassing cost figures, called the reduction-in-yield (RIY), and publish them on key investor documents (KIDs).
Professional investors have been obliged to report these costs in the look-through calculations of any portfolios they run on behalf of clients, making those including closed-end funds look more expensive.
This has helped to contribute to declining participation in the investment trust sector by large, institutional investors and has accelerated the reduction in the number of trusts over the past few years, leaving those that have survived on wider discounts than they might otherwise have been.
The most important of the FCA’s changes, in our view, is that fund of funds will no longer have to include the ongoing charges figure (OCFs) of investment trusts when reporting look-through costs.
This removes one big obstacle to investment at size by large, open-ended fund managers and could prompt the return of institutional buying next year, which could be positive for share prices.
Two obvious beneficiaries are private equity and real assets, sectors where discounts have remained stubbornly wide for longer than perhaps they should have.
Listed private equity trusts have historically had to report high KID RIYs, including the cost of their gearing facilities. Since reporting high costs will no longer be a factor holding back institutional investors from the sector, high discounts could look tempting.
NB Private Equity (NBPE), for instance, trades on a discount of 23% at the time of writing, despite having two-thirds of its portfolio in tech, media & telecoms; consumer/e-commerce; and industrials/industrial technology, all of which are popular growth sectors in the public markets.
CT Private Equity (CTPE), meanwhile, offers exposure to another historically high-growth area, small-caps, with a portfolio of niche businesses unlikely to be found in any public equity small-cap fund. The discount has narrowed in the past five or six weeks, from 30% to 20%.
Moving onto real assets, where portfolios are often seen as being full of complex investments, institutional investors are well placed to do the research and understand the likely values of each portfolio.
Crucially, they can also agitate for corporate activity, whether that be buybacks, asset divestments, or wind-ups, an approach to value realisation that is gathering steam across infrastructure and property sectors.
MIGO Opportunities (MIGO) has recently revamped its approach to concentrate on trusts in these sectors and engage with boards to unlock the value. Greater institutional presence in the sector could see more momentum behind these trades, potentially helping MIGO itself.
Away from the obvious, the near-£13bn Scottish Mortgage (SMT) and its ilk are large and liquid enough for institutional investors to take meaningful positions. Despite SMT looking relatively cheap from an ongoing charges figure (OCF) perspective, its most recent KID RIY was 50 basis points higher.
SMT presents investors with a cheap – and discounted – way of accessing exciting private holdings such as SpaceX, which is reportedly mulling an IPO that would make it the sixth largest company in the world and by far and away the global leader in an industry with massive growth potential.
We’ll refrain from making too many predictions that are at risk of being immediately wrong and/or out-of-date, but we do hope that while work still needs to be done in other areas, the FCA’s changes to cost disclosure rules will be good for the sector and for its many shareholders.
David Brenchley is an investment specialist at Kepler Trust Intelligence. The views expressed above should not be taken as investment advice.