There have been big celebrations in the world of investment trusts over recent weeks. The industry is 150 years old this year, which seems an excellent reason for parties and cake. The oldest trust, Foreign & Colonial Government Trust (as it was originally known), was set up in 1868 ‘to give the investor of moderate means the same advantages as the large capitalists, in diminishing the risk of investing’ through access to a diversified portfolio of government bonds, with a view to a 7 per cent yield.
By coincidence, Foreign & Colonial’s 150th birthday is this very day of writing, 19 March. The founders set out their stall to raise £1 million, so they would no doubt be quite astonished to know that not only is it still going strong, but it’s worth a massive £3.5 billion – second only to Scottish Mortgage.
The investment trust model proved a successful one in those later days of the Empire, and there were more than 25 trusts in existence by the start of the First World War. Since then, however, the industry has had its ups and downs. By the late 1990s the trust model was being held back by its stuffy, old-fashioned image in the face of the tech boom and storming stock markets, but the fortunes of investment trusts have picked up this century.
Level playing field
In the past three or four years, there have been big changes in the rules governing the way investments are sold to consumers. In particular, the end of the system of commission paid by open-ended fund managers to advisers selling their funds, together with the rise of consumer-facing platforms, have helped to level the playing field between trusts and open-ended investments and bring them to the notice of a greater number of private investors.
So there’s plenty to justify a knees-up at the Association of Investment Companies (AIC), it would seem. Certainly, statistics from the AIC suggest things are going well: there are now around 390 investment trusts and companies available, with assets under management standing at a record high of £175 billion as at the end of 2017. And trusts’ long-term outperformance of unit trusts is not to be sniffed at: according to the AIC, over 35 years to the end of December 2017 an investment in the average investment company was up 5,662 per cent – roughly double the 2,824 per cent achieved by the average open-ended fund.
However, the industry continues to evolve. One trend that has emerged is that wealth managers – some of the leading buyers of investment trusts – have been energetically consolidating over recent years. These mega-managers are being driven towards larger, more liquid trusts (typically valued at upwards of £500 million these days, according to Nick Greenwood, manager of Miton Global Opportunities) where they will be able to buy enough shares to allocate across their various portfolios.
Individual private investors, of course, are not constrained in the same way and can still buy trusts of any size; moreover, says Greenwood, they are generally ‘being paid royally (via the discount) to accept the illiquidity risk’ that is inherent in small trusts.
Perhaps more significant for private investors is the growing range of asset classes being targeted by new investment trust launches. During the past 10 years of cheap money and rock-bottom savings rates, with bonds offering poor value and dividend-paying equities becoming increasingly sought-after, investors have been driven to seek out alternative sources of reliable income. So against that backdrop, it’s hardly surprising that most of the new launches seen in the investment trust arena have focused on alternative assets that can provide high, sustainable yields – in particular property and infrastructure.
The closed-ended structure of trusts is absolutely key for such asset classes, where valuations take place only infrequently and sales or purchases can be a protracted business. By issuing a fixed number of shares and leaving the share price to absorb fluctuations in supply and demand, the trust’s assets are protected if the market takes a tumble and investors flee. The share price will be hit, but – in contrast to open-ended fund managers – managers don’t have to make forced sales or hold lots of cash in order to cover investor redemptions.
As Greenwood observes: ‘It would be difficult to manage a portfolio of alternatives such as forestry, peer-to-peer lending, secondhand life policies, Russian warehouses, infrastructure such as a Catalonian metro line, or a mortgage debt portfolio within a daily traded open-ended fund.’
Indeed, he adds, by far the most important attribute of a closedended fund is the protection that the manager has from daily cash inflows and outflows. ‘This is why, historically, closed-ended funds have outperformed; and given that markets are becoming steadily less liquid, it will be more valuable going forward than it has been historically. It’s why private investors should buy trusts.’
Here at Money Observer we have long been big fans of investments trusts – evidenced by our dedicated quarterly supplement to the sector. We raise a glass to the next 150 years of investment trusts catering for the private investor.
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