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How retail investors are changing the investment trust space

10 February 2020

BlackRock’s Melissa Gallagher explains the impact that retail investors are having on investment trusts and the likely trends in 2020.

By Eve Maddock-Jones,

Reporter, Trustnet

Concerns about liquidity and the ease with which investment trusts can now be accessed is causing more retail investors to sit up and take notice of closed-ended funds, according to BlackRock’s Melissa Gallagher.

Gallagher (pictured), co-head of investment trusts at the asset manager, said that recent levels of issuance by investment trusts has shown that there is pent-up demand for investment trusts, which is also driving the types of strategies that are coming to market.

“My sense now – and having seen the share registers change over the last five or six years – [is that] you see the execution-only platforms coming further up the share register list,” she said.

“And that’s great because then you’ve got the private investors actually doing their own research.

“They’ve made a decision that they don’t want to go via an adviser for whatever reason, and they’re going to do their own research and then transact, probably, or hopefully through a cost-effective platform.

“That gives the end investor the empowerment to make their own decisions and to do their own research based on what’s out there.”

The rise of the retail investor has been driven by several factors, according to Gallagher.

Technology has had a “huge” impact over the last 10 years, said Gallagher, facilitating the ease with which investors are able to transact and research.

Another factor is the changing demographic profile of retail investors, with a younger generation coming through, bypassing traditional distribution channels.

She explained: “I think in the old model, especially before iPhones or whatever came along, you went through an adviser who probably would have said ‘well, do you have £10,000 to invest?’

“Now, you can invest £100 or whatever. So, the barriers have come right down, which is great.”

However, despite the advent of new technologies there are still a number of challenges to overcome.

Although people are becoming more inquisitive and “financially savvy”, said Gallagher, there are new communications barriers, which can become a problem when it comes to AGM voting, for example.

“Some platforms are better than others, but that platform may not be alerting the holders that there’s a vote,” she said.

The advent of a new type of investor is also having an impact on the types of funds that are being launched, Gallagher said, with more alternative trusts coming to market, such as renewable energy strategies.

Gallagher said last year there was almost £9bn worth of issuance last year the majority of which came from the alternative investment space.

“The alternatives really are leading the way still. I think there still is a demand for this income element side for yield and something which is obviously uncorrelated with equities,” she explained.

“Obviously this is the space that’s still very much in demand,” she said, adding that investors are increasingly turning to trusts for more illiquid assets.

As the chart below shows the best performing investment trust sector over the past 10 years was an alternatives sector – IT Biotechnology & Healthcare, with a return of 490.77 per cent.

AIC top 10 investment company sector returns over 10yrs


Source: AIC

In second place, however, was the IT UK Smaller Companies sector which made 378.51 per cent over the past decade.

This is likely a more surprising outcome as the UK market has been famously out of favour with asset allocators since the 2016 EU referendum, which – together with a government unable to command a majority in Parliament on how to leave the bloc – has caused much uncertainty about its economic prospects.

Gallagher said there had been a “big shift” taking place since December’s general election, which saw the Labour party under left-wing leader Jeremy Corbyn lose a significant number of seats and return a large majority for the Conservative party.

“Following the Brexit announcement several years ago, and other things investment in UK was put on hold,” she explained. “Now there’s a lot more clarity. I think people are taking more of an interest in the UK, in the UK market, which is great.”

This has been reflected in greater levels of interest in the asset manager’s £930.5m BlackRock Smaller Companies trust, managed by Roland Arnold.

The small-cap focused trust made £16m in new share issuance in December, the first time since 2004 on the back of increased appetite.

“Now [investors] have got the green light following the UK election, I think it gives them the confidence to move forward and is why we’ve seen this small- and mid-cap part of the market increase,” Gallagher said.

Performance of trust vs sector & benchmark over 5yrs


Source: FE Analytics

The BlackRock Smaller Companies trust has made a returns of 138.62 per cent over the past five years, outperforming both the IT UK Smaller Companies sector (81.08 per cent) and the Numis Smaller Companies plus AIM index (47.93 per cent).

The trust has ongoing charges of 0.73 per cent, is a trading at a small premium to net asset value (NAV) of 0.1 per cent and is 3 per cent geared.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.