Foreword
By Annabel Brodie-Smith
On the first day of Christmas, my true love gave to me… a leadership challenge and extended uncertainty about Brexit. It certainly hasn’t been a dull December with the political stakes riding high, trade wars capturing the headlines and markets heading south. It’s been enough to drive me to mulled wine and mince pies – not that I need any encouragement on that front! But as ever it’s when times get tough that true investors come to the fore with a diversified and long-term approach.
Our esteemed investment expert, Ian Cowie sums it all up, “Political uncertainty may continue to cloud the outlook in 2019 but a globally-diversified portfolio should continue to deliver winners as well as losers, income and growth, whatever the future holds.” So true, and lucky Ian took profits from his three top-performing investment companies just before the market setbacks, but “prescience played no part”. His wife, Sue found a coastguard’s cottage which she had set her heart on. And that’s another investment lesson which is easily forgotten. Investors save prudently so they can have a comfortable future but also so that they can enjoy themselves. Good for Ian and Sue!
On prospects for markets for next year and beyond, it was fascinating to discuss this with our longest serving investment company manager, Peter Spiller of Capital Gearing, Simon Edelsten, manager of the Global investment company, Mid Wynd International and Jean Roche, manager of Schroder UK Mid Cap. It’s well worth watching the video to see their very different approaches. Peter Spiller with his capital preservation strategy is more defensively positioned than he has ever been in 36 years. Simon Edelsten is cautiously optimistic and has kept his growth stocks, but with the bull market getting long in the tooth, is running a balanced fund.
The outlook for 2019: Panel discussion with Mid Wynd International, Schroder UK Mid Cap and Capital Gearing
Jean Roche has been finding opportunities in the UK as the market is historically cheap and is expecting clarity next year on Brexit, which she hopes will benefit these investments.
For a wide range of manager views on the outlook for markets for next year and longer, do read our fund manager poll. The UK and US are the regions tipped for 2019 and Emerging Markets is expected to be the best performing region over 5 years. Trade wars are believed to be the greatest threat and the greatest cause for optimism was global growth. There are lots of interesting views expressed, including those of Andrew Bell of Witan, Simon Gergel of Merchants, Alex Wright of Fidelity Special Values and Nick Train of Finsbury Growth & Income. Of course, no-one has a crystal ball and no-one knows what the future will bring but it’s useful to gauge views.
Don’t miss AIC Chief Executive, Ian Sayers’ perspective on this important year, the 150th birthday of investment companies. He gives his thoughts on the industry’s fundraising, the attractions of alternative assets and investment companies’ income benefits and when facing an uncertain road ahead, the long-term advantages of equities. As it’s been a milestone year, we have also collated the thoughts of our chairman, analysts, wealth managers and members on what’s next for investment companies and the key trends of the future.
If anyone feels lucky, the AIC is currently running a competition to win one of five prizes of £1,000 to invest in an investment company for a child or grandchild. We have also created a new page of the website on saving for children with investment companies which includes our new saving for children video. With Christmas fast approaching this could be a potentially life-changing present for your child or grandchild.
For our first Christmas in Oxfordshire, we have lots of family coming for the usual fun and complete chaos that makes up Christmas.
I would like to wish you a Merry Christmas and a Happy New Year.
Bring on the mulled wine and mince pies!
Annabel Brodie-Smith
Communications Director, AIC
Rejoicing in reflection?
Ian Cowie looks at his personal portfolio's performance in 2018
Ian Cowie
It was a difficult year for global stock markets and your humble correspondent’s personal portfolio but, throughout 2018, diversification saved the day. A global range of investment companies, spread across various commercial activities and countries, helped to smooth out the shocks of trade wars, Brexit talks and other surprises.
Professional asset allocation within closed-ended funds also paid off, providing managed access to specialist sectors of which I know little and overseas markets that trade while we sleep.
For example, the top performer in my ‘forever fund’ of 14 investment trusts is focused on the other side of the world. Meanwhile, the 2018 laggard is much closer to home in Europe, perhaps unsurprisingly during a period dominated by political uncertainty here.
"A global range of investment companies, spread across various commercial activities and countries, helped to smooth out the shocks of trade wars, Brexit talks and other surprises."
Ian Cowie
European Assets (EAT) suffered share price losses of nearly 18% in the year to the end of November, as small and medium-sized companies struggled to cope with macroeconomic and geopolitical headwinds. But a high distribution policy sustained an above-average dividend yield of 7.9%, giving income-seeking shareholders good reason to be patient.
Trade wars between both of the biggest economies in the world hit the second-from-last investment trust in my forever fund quite hard. Fidelity China Special Situations (FCSS) saw its share price fall by more than 14% in the year to date. Similarly, tariff hikes and fears they will depress trade sent tremors across developing economies, formerly focussed on exports. JPMorgan Emerging Markets Income (JEMI) suffered losses of nearly 11% with JPMorgan Indian (JII) not much better and almost 10% down.
The other fallers in my ‘forever fund’ in 2018 were Schroder Oriental Income (SOI), down just over 5%, Henderson Far East Income (HFEL) and BlackRock Latin American (BRLA); both about 4% lower. Once again, above-average yields of 4.1%, 6.5% and 5.1% respectively gave reason to be grateful for income to offset capital setbacks.
Fortunately, there were winners as well as losers in terms of share price total returns during 2018. Rising demand for warehouse space and other commercial real estate on the Continent helped Aberdeen Standard European Logistics Income (ASLI), which was launched last December and is still allocating assets, to remain marginally positive at 1% with JPMorgan US Smaller Companies (JUSC) delivering nearly 4% total returns.
Perhaps appropriately on the 50th anniversary of the Tet Offensive, Vietnam Enterprise Investments (VEIL) bucked the emerging markets trend by winning share price gains of 5%. A welcome albeit partial recovery at Woodford Patient Capital Trust (WPCT), the disruptive start-ups specialist, also returned 5% over the year to date. Investments in innovation helped Polar Capital Technology (PCT) gain podium place with the third-best performance in my investment trust portfolio during 2018 and a total share price return of just over 5%. Well, I did say it was a difficult year.
"Independent statisticians at Bloomberg reckon the FTSE 100 index of Britain’s biggest shares fell by nearly 12% in the year to date... Meanwhile, Morningstar calculates that the average return from all conventional investment trusts during 2018 was 1.5%."
Ian Cowie
To put that in perspective, independent statisticians at Bloomberg reckon the FTSE 100 index of Britain’s biggest shares fell by nearly 12% in the year to date, while the Dow Jones index of American blue chips remained marginally positive at 1%. Meanwhile, Morningstar calculates that the average return from all conventional investment trusts during 2018 was 1.5%. Handsomely ahead of that, specialist professional fund management in a sector where I know next to nothing helped Worldwide Healthcare Trust (WWH) deliver returns of above 7%.
Best of all, Baillie Gifford Shin Nippon (BGS) succeeded in identifying smaller Japanese companies that generated share price returns of 8%. Needless to say, the corporate names in its top 10 holdings are foreign to me but this individual investor is glad to gain professionally managed exposure to these far-off opportunities for capital growth.
Taking winners and losers into account, my forever fund's performance was marginally negative in capital terms during 2018 with share price shrinkage of less than 1%.
More by luck than judgement, I took profits from my three top-performers, BGS, WWH and PCT, just before global stock market setbacks that soon become known as ‘Red October’. Prescience played no part but Sue, my wife, had found a coastguard’s cottage on which she set her heart. So I decided to raise cash on the basis that paper profits are all very well but you haven’t really made a penny until you sell.
Dividend income, where investment trusts have a unique ability to smooth out shocks and sustain payouts, helped to improve the rear view of a difficult year. Political uncertainty may continue to cloud the outlook in 2019 but a globally-diversified portfolio should continue to deliver winners as well as losers, income and growth, whatever the future holds.
The AIC fund manager poll
Investment company managers pick their favourite opportunities for 2019
- Emerging Markets expected to be best performing region over 5 years
- Global growth remaining strong is greatest cause for optimism
- Most managers expect FTSE 100 to close 2019 between 7,000 and 7,500
Investment company managers named the UK and the US as the regions they think will produce the best stock market returns in 2019 in an annual fund manager poll by the AIC.
Despite continued uncertainty surrounding Brexit and the US recording its longest bull market in history, managers believe the UK and the US have the greatest potential to reward investors next year. Both received 27% of the votes, the highest proportion, followed by Emerging Markets (20%). However, managers viewed Emerging Markets as the strongest region on a five-year view, with 33% of voters expecting it to produce the highest return. The US was also popular over this timeframe, getting 20% of votes, followed by the UK, Europe and Asia Pacific ex Japan all receiving 13%.
Cause for optimism and threats
Despite recent uncertainty, investment company managers felt global growth remaining relatively strong was the biggest cause for optimism in 2019 (33%). This was followed by the possibility of a positive Brexit outcome (27%).
On the other hand, trade wars were viewed as by far the biggest threat to equities over the coming 12 months. They received 47% of votes, significantly outstripping managers’ next biggest concern which was monetary tightening (27%).
Where will the FTSE 100 close in 2019?
Nonetheless, manager optimism remains strong, with 80% expecting stock markets to rise in 2019. Estimates as to where the FTSE 100 might close at the end of 2019 centred around the 7,000-7,500 range (40% of respondents), with 20% expecting a close between 7,500 and 8,000 and a further 20% favouring 6,500 to 7,000.
The UK’s strong prospects
Simon Gergel, portfolio manager of Merchants said: “Rather than 2019 being a year for making resolutions, it promises to be a year of resolution. The fog should gradually lift on what Brexit will actually mean for the UK as well as who will be leading the country. An end to uncertainty could release pent-up demand in the economy and could herald a return of foreign buying of UK equities, and a revaluation of the stock market from depressed levels.”
Alex Wright, portfolio manager of Fidelity Special Values said: “The unrelenting negativity that investors are demonstrating towards UK equities is making me feel more and more positive on their prospects for 2019. It might be counterintuitive to think that the UK market could be among the top performers globally in the year that we leave the EU (if indeed we do). But markets have a way of confounding expectations and surprising the consensus.
“I do not have a view on whether a soft or hard Brexit is more likely. My positive outlook for UK equities simply relies on some clarification in the relationship between the UK and the EU, which would act as a catalyst for investors to revisit the UK equity market as a destination for capital. It may be a cliché, but investors really do hate uncertainty, and for global asset allocators, there has been little incentive to do the work on cheap UK shares.”
Callum Abbot, co-manager of JPMorgan Claverhouse said: “If we see market concerns abate on Brexit, trade wars and US monetary policy easing then equity markets can rally after a challenging end to 2018. The UK equity market is particularly unloved due to Brexit. A palatable resolution could be a ‘double dividend’ through a re-rating and a re-allocation to UK equities.”
"The unrelenting negativity that investors are demonstrating towards UK equities is making me feel more and more positive on their prospects for 2019."
Alex Wright, portfolio manager of Fidelity Special Values
Alasdair McKinnon, manager of The Scottish Investment Trust said: “The political climate is volatile. The US-China trade war is unpredictable, especially for emerging markets. Europe faces rising political upheaval and closer to home, Brexit will obviously be key. Investors currently view the UK market as toxic. Can it get worse? Potentially yes – but for contrarians like us, some of these unloved markets are starting to look like the sort of ugly ducklings that present attractive long-term opportunities.”
Positive outlook for 2019
The outlook for 2019: Panel discussion with Myd Wynd International, Schroder UK Mid Cap and Capital Gearing
Andrew Bell, Chief Executive of Witan said: “Equity valuations appear very reasonable to us, given that interest rates are set to remain low and assuming recessionary risks, such as from adverse trade policies, are avoided. Recent months have seen more encouraging news on trade disputes, interest rates, oil prices and even Brexit (where a cliff-edge no-deal exit now seems improbable). Equity markets have chosen to focus on worries about slowing economic growth that may prove to be overblown.”
"'In the future all companies will be Internet companies.' We continue to find Andy Grove’s observation of great relevance for understanding the performance of the UK and global equity markets."
Nick Train, manager of Finsbury Growth & Income and Lindsell Train
Simon Edelsten, fund manager of Mid Wynd International said: “We take a positive view of equity markets in 2019 as valuations have recently come down to attractive levels. 2018 saw a combination of rising US interest rates, trade wars, Brexit and a world economy slowing its growth rate from a very high level. Many of these issues may moderate in 2019 with US rates, in particular, not needing to rise much further given more modest growth and persistently low inflation.”
Jean Roche, co-manager of Schroder UK Mid Cap said: “Our outlook for 2019 is cautiously optimistic as the UK market is inexpensive and expectations are low, against an economic backdrop which is far from dire, with record low unemployment and a return to real earnings growth.”
Tech disruption offers both opportunities and threats
Nick Train, manager of Finsbury Growth & Income and Lindsell Train said: “‘In the future all companies will be Internet companies.' We continue to find Andy Grove’s observation of great relevance for understanding the performance of the UK and global equity markets. His quote seems to us to be true – in that most companies we know are indeed becoming more like internet companies.
“But it also provides explanatory power for the way stock prices are performing. In 2019 it looks as though working out which companies are advantaged and which challenged by digital disruption, may deliver better returns than establishing what is currently ‘cheap’ or ‘dear’ or whether macro-economic trends favour ‘cyclical value’ or ‘quality growth’.”
"We believe that industry change, often in some form of disruption, such as in distribution or manufacturing, or indeed changes in consumer behaviours, will be a key driver of stock market returns in the years ahead, both positive and negative."
Dan Whitestone, portfolio manager of BlackRock Throgmorton
Jean Roche, co-manager of Schroder UK Mid Cap said: “Opportunities are plentiful in classic ‘stockpicker sectors’ undergoing or driving structural change, such as retail and technology. The result of this is that the risks lie mainly in disruption, where companies or management teams who do not innovate get left behind. Mid-caps, our area of focus, are ideally positioned to be able to adapt to a changing world as they tend to be nimble whereas elephants (large-caps) rarely gallop.”
Dan Whitestone, portfolio manager of BlackRock Throgmorton said: “The rate of industry change is accelerating in our view. This is an exciting time to invest as we try to identify the new wave of emerging companies coming through, as well as detecting any flaws developing in existing business models. We believe that industry change, often in some form of disruption, such as in distribution or manufacturing, or indeed changes in consumer behaviours, will be a key driver of stock market returns in the years ahead, both positive and negative.”
Trade wars, valuations and debt
Simon Edelsten, fund manager of Mid Wynd International said: “The greatest risk is a further deterioration in US-China trade relations and a knock-on hitting other emerging markets. We have therefore positioned Mid Wynd International to benefit from growth opportunities in automation, online services and tourism, but selecting investments on modest valuations, well supported by cash flows and strong balance sheets. A well-diversified and modestly valued portfolio should cope with the surprises that 2019 has in store.”
Peter Spiller, manager of Capital Gearing said: “There are two big risks that we see. First, valuations of all financial assets have been hugely distorted by quantitative easing and remain at very high levels compared to history. Second, there is simply too much debt in the world. This acts as a brake on growth and also makes both the economy and the financial system fragile to shocks.
“There aren’t many assets that we can get truly excited about. Prices of most financial assets are, in our view, too high to be justified by fundamentals. US inflation-linked bonds, which offer a positive real yield of around 1%, are probably the most attractive major global asset.”
"The greatest risk is a further deterioration in US-China trade relations and a knock-on hitting other emerging markets."
Simon Edelsten, fund manager of Mid Wynd International
Zehrid Osmani, portfolio manager of Martin Currie Global Portfolio said: “As we continue to look forward, given that we are in the later stage of the longest expansionary economic cycle in the financial markets, there is a growing risk of recession coming up in the next two to three years. For us however, it isn’t so much about whether a recession will happen because it is likely. The more important aspect to reflect on and analyse is what shape the next recession will have; specifically, will it be a shallow or deep recession, and will it be short or long-lasting? Our view is that it will be a short and shallow recession, and therefore there will be an opportunity for long-term investors to increase their exposure to equities in the next growth cycle.”
Why threats warrant active management
Andrew Bell, Chief Executive of Witan said: “Technological disruption to established businesses, central bank tightening and a muted economic cycle continue to argue for a selective approach to picking stocks but the macro backdrop appears less gloomy than the recent market mood implies.”
Craig Baker, CIO at Willis Towers Watson, investment manager of Alliance Trust said: “Policy uncertainty will drive greater variation in industry and stock returns due to the different directional impacts of policy. Additionally, in the US, late-cycle pressures also increase the importance of company-specific factors, such as margins or leverage. Our outlook for lower stock correlation and rising volatility means that micro factors and active management are becoming more important for the returns from equity investments.”
Uncorrelated investments becoming more important
Dion Di Miceli, head of investment companies at Gravis Capital Management said: “We are living through turbulent times with huge uncertainty hanging over the political and economic world. Future developments are only likely to increase investor angst over the coming months and years, leaving many searching for fresh ideas that offer non-correlated investments with stable, dependable returns. At Gravis we believe the investment company structure offers investors access to areas such as infrastructure projects and asset-backed finance, diversifying their portfolio whilst not risking returns.”
Dean Orrico, president of Middlefield International Limited, investment advisor to Middlefield Canadian Income said: “We seem to be entering a period of more modest growth and portfolios should be positioned accordingly. Becoming more defensive by focusing on equity income, real estate, healthcare and energy pipelines is preferable. Central banks globally should consider becoming more dovish so as not to exacerbate the slowdown.”
Pedro Gonzalez de Cosio, CEO of Pharmakon Advisors, investment manager of BioPharma Credit said: “With the outlook for global equity markets increasingly difficult to predict, we believe that investors will appreciate the value of fully-covered income producing assets and alternatives that are uncorrelated to equity price movements. Thankfully, the investment company universe is highly varied and offers a wide variety of high yielding alternative income investments. In general, we expect the more specialist of these vehicles with differentiated investment strategies to have the potential for greater distribution of returns.”
Asset allocation
Mark Whitehead, manager of Securities Trust of Scotland said: “As trade wars, geopolitical tensions and market volatility escalate, it is useful to remind ourselves that high quality, structural dividend growth stocks should offer protection and opportunity as a style, during the last stages of expansion of the economic cycle.”
US remains strong
Katy Thorneycroft, fund manager of JPMorgan Multi-Asset said: “Within equities, we still favour the US and are sceptical of Eurozone stocks. The US has led throughout this cycle and in weak markets this autumn failed to outperform, but we believe the earnings resilience of the US is superior and will be supportive over 2019. By contrast, political woes are simmering once again in Europe, recent earnings seasons were lacklustre at best, and valuations aren’t cheap enough to be compelling. In our view, the same is true in emerging markets, where slower growth and the higher cost of US dollar funding both weigh on the earnings outlook; thus we are marginally underweight emerging market equity.”
Dawn Kendall, managing director at SQN Asset Management, investment adviser to SQN Secured Income Fund said: “Despite wider concerns regarding the style of presidency and the rise of populism globally, business data from the US remains good and the risks to economic development remain benign. The outlook for Europe is less certain and focus will be on financial institutions and their ability to sustain a downturn. In the medium term, reform of core institutions in this region will be key. Further afield, the lead will be taken from America and will be determined by trade and dollar strength. These comments reinforce our opinion that alternative lenders will continue to have a rich pipeline of opportunity as banks in Europe are forced to reassess their risk appetites as focus is once again placed on their balance sheets.”
Technology performance mirroring 2018
Walter Price, fund manager of Allianz Technology said: “As we examine the outlook for technology companies in 2019, we think it may mirror the results in 2018, but in a true mirror image: cross currents and some weakness in the first half, and strength in the second half; the opposite of what we have seen in 2018 for the sector. In summary, we expect a slow start and a strong finish for the technology sector in 2019.”
Attractive valuations in Asia
Dale Nicholls, portfolio manager of Fidelity China Special Situations said: “Investing in China this past year has certainly not been for the faint-hearted as investors have had to deal with volatility, trade wars, and a slowdown in consumption. Of greater concern however is the broader impact on general sentiment and the prospect of delayed investment by Chinese companies in general.
“And yet, despite these concerns, I am buoyed by the fact that growth rates in China remain the envy of most economies. As such, activity in the portfolio has been focused on opportunities that arise during a period of indiscriminate sell-off. In certain companies and sectors such as investment and insurance companies, valuations have dropped to historically low levels that significantly discount their attractive long-term growth prospects.”
Andrew Graham, portfolio manager of Martin Currie Asia Unconstrained said: “Thanks to positive underlying secular trends, Asian equities remain an attractive destination for investors seeking long-term capital and income growth. A near-term slowdown in global economic growth is already partly discounted in share prices and earnings expectations, and valuations have once again come down to attractive levels.”
Mulling it over
AIC Chief Executive Ian Sayers looks back on 2018 and forward to the future
Ian Sayers
The end of the year always prompts people in financial services (who perhaps should know better) to make predictions for the following year. I am as guilty as the rest. For example, in the early months of at least two of the past five years, I have commented that the recent boom in fundraising in the investment company sector might have come to an end, only to see record sums being raised by the time the year was out.
Amply demonstrating that the only lesson of history is that the lessons of history are not learned, I was at it again this year, as fundraising in 2018 started off very sluggishly. And yet again, the sector confounded me by picking up sharply in the second half, with the strongest fundraising month for five years in October, including the launch of the largest ever UK investment trust.
So far, more than £7.5 billion has been raised in total, putting it on course to be one of the best years in the past decade, with both IPOs and fundraising by existing companies receiving strong support. Off the back of this, the sector’s assets continued to reach new all-time highs, reaching £189 billion in September 2018. The sector has roughly doubled in size since 2013, growing faster than the open-ended sector.
So where does that leave us, with markets retreating since October and probably the hardest forecast of all (the final outcome of Brexit) still defying any form of sensible prediction? Who could say with any confidence who the Prime Minister will be by the end of next year or even with absolute certainty which party he/she will be leading? The answer is, of course, that no-one knows for sure the answer to any of these questions, though that won’t stop pages of speculation about them. However, for the investment company sector, the drivers for its recent success are still very much in place.
"Who could say with any confidence who the Prime Minister will be by the end of next year or even with absolute certainty which party he/she will be leading?"
Ian Sayers
Alternative assets that are not directly correlated to stock markets, such as property and infrastructure, will remain attractive if market volatility continues and, being illiquid, are much better held in the closed-ended structure. And the unique income advantages of investment companies should remain attractive for as long as interest rates remain so low, particularly for investors taking advantage of pension freedoms by generating a retirement income from their investments.
So, as we come to the end our celebrations of the launch of the first investment company 150 years ago, perhaps 2019 should be the year that some of us learn one of the key lessons from history, which is that investing really is a long-term business, and that short-term downturns often end up as the buying opportunities for the future.
After all, anyone who shunned equity markets 10 years ago as the financial crisis started to bite and moved to the ‘safe’ haven of cash, missed out on one of the strongest market rallies in generations.
"The unique income advantages of investment companies should remain attractive for as long as interest rates remain so low, particularly for investors taking advantage of pension freedoms by generating a retirement income from their investments."
Ian Sayers
So enough of predictions. Instead, I will stick to much safer territory by wishing you all a Merry Christmas and Happy New Year.
Crystal gazing
2018 has been a milestone year but what's next for the investment company industry?
2018 has been a milestone year for the investment company industry. As well as marking the 150th anniversary of the launch of the first investment company, F&C Investment Trust, 2018 saw the industry’s assets reach an all-time high of £189 billion in September and the largest-ever launch of a UK investment company, Smithson, raising £822 million in October. With discounts at -2.6%, close to an all-time low, and the average investment company returning 254% over the past ten years, far outperforming open-ended funds’ return of 148%, it has been a strong period for the sector.
However, with the anniversary celebrations now drawing to a close it’s time to look ahead. What’s next for investment companies and what are the key trends of the future?
Investment companies in good health
Rachel Beagles, Chairman of the Association of Investment Companies said: “2018 has been a good year for investment companies despite the sell-off in October. Discounts have remained narrow and fund raising overall has been good, with a particularly strong October. It’s been interesting that although income-focused alternatives have once again been a big feature in issuance, 2018 has seen a pickup in IPO activity for companies promoting equity and growth strategies, albeit each with clearly differentiated selling points.”
Charles Cade, Head of Investment Companies Research at Numis Securities said: “The investment company sector is in very good health, with record levels of new and secondary issuance in recent years. £11.9 billion was raised in 2017 via IPOs and secondary issues, and whilst the total in 2018 to-date of around £8.4 billion is lower, we have seen the largest IPO on record through the £822 million launch of Smithson. The sector’s assets grew by 13.7% pa over the five years to December 2017, outpacing the 11.9% pa growth in the assets of unit trusts/OEICs. Much of this has been driven by the strong demand for alternative income mandates given the low returns on cash or corporate bonds. However, there has also been significant growth in demand from UK retail investors via platforms. These investors have typically focused on funds investing in equities, with Scottish Mortgage and Finsbury Growth & Income being amongst the most popular.”
"2018 has been a good year for investment companies despite the sell-off in October. Discounts have remained narrow and fund raising overall has been good."
Rachel Beagles, Chairman of the Association of Investment Companies
Simon Fraser, Chairman of F&C Investment Trust said: “It is remarkable to think that the original purpose of F&C Investment Trust has remained relevant throughout its long history, aligned to the principles it was founded on in 1868: long-termism, a pioneering approach and a desire to help investors of modest-means provide for their future. The world may look very different today than it did 150 years ago, but these tenets are as relevant now as they were back then.”
James Burns, Partner at Smith & Williamson said: “It’s been another successful year for the investment company industry. There have been a good number of new issues, including the biggest ever launch of a UK investment company, Smithson. What’s also been interesting is that we’ve seen the launch of several equity investment companies, such as AVI Japan Opportunity, rather than just alternatives. There have also been lots of existing investment companies getting bigger through secondary issuance. What’s been encouraging too is that whilst there’s been volatility in recent months investment companies have not been unduly hurt. Discounts have not widened greatly.”
"The sector’s assets grew by 13.7% pa over the five years to December 2017, outpacing the 11.9% pa growth in the assets of unit trusts/OEICs."
Charles Cade, Head of Investment Companies Research at Numis Securities
Tim Cockerill, Investment Director at Rowan Dartington said: “2018 has been a good year on the whole for investment companies, a lot of new issues and with a good breadth of mandates, which is something the investment company industry can uniquely offer. One that stood out for me in the alternative space was Hipgnosis (song royalties). It’s different and provides access to an asset class not previously available. Some raised fantastic amounts, whilst some managers I know were disappointed. This asset allocation is always interesting to watch. With many uncertainties on the horizon in 2019 the performance of the new funds will be watched keenly, as will the established funds, but I’m expecting 2019 to be quite a lot more challenging.”
Income remains important
Simon Elliott, Head of Investment Trust Research at Winterflood Securities said: “The trends that the investment companies sector has seen for several years now look set to continue in 2019. The closed-ended structure has clear advantages in providing exposure to less liquid assets classes and allowing greater dividend certainty. This appeals to a wide spectrum of the investment community, including institutional investors often in the form of multi-asset managers investing in alternative asset classes, while direct retail investors appreciate the certainty that ‘dividend heroes’ such as City of London and Bankers provide. Wealth managers remain key supporters of investment companies, investing in a wide range of asset classes and strategies, albeit the larger groups are increasingly outgrowing some of the smaller investment companies in the sector.”
Alan Brierley, Director, Investment Companies at Canaccord Genuity said: “A key feature of the evolution of the sector over the past 15 years has been the growth of alternatives. While we are encouraged to see the introduction of a number of high-quality equity investment companies in the past couple of years, we expect future growth to be dominated by alternative income. Notably, there has been a growing awareness that illiquid assets are not suited to open-ended funds and this should fuel further growth of the alternatives. A word of caution though, alternatives are not a panacea and we expect a polarisation between the fortunes of the underlying companies.”
"The closed-ended structure has clear advantages in providing exposure to less liquid assets classes and allowing greater dividend certainty."
Simon Elliott, Head of Investment Trust Research at Winterflood Securities
Challenges but resilience is increasing
Charles Cade, Head of Investment Companies Research at Numis Securities said: “A challenge for investment companies is their ability to weather tougher market conditions, such as a significant correction in equity markets. Discounts tend to widen when investor sentiment is weak, and it may become more difficult for funds to grow through share issuance. However, the closed-ended nature of investment companies should help them as managers are not forced to sell assets to meet redemptions, and dividend yields can be maintained by using reserves if necessary.
“Furthermore, the sector appears in far better shape than before the global financial crisis, as funds generally have more conservative gearing, improved corporate governance, and discount control mechanisms that are better suited to the liquidity of their underlying portfolios. In addition, there is now a far broader universe of funds with mandates that have little correlation to equities such as infrastructure and renewable energy, as well as many of the specialist debt and property vehicles. Overall, therefore, we remain positive on the outlook for the investment companies sector and believe that the range of opportunities on offer is greater than ever.”
Stronger support from advisers
Mickey Morrissey, Partner at Smith & Williamson said: “The industry will see ever-increasing support from advisers who for years have failed to invest in investment companies. A combination of regulatory issues like MiFID II, better education and access to investment companies means more support for them, either directly from advisers or from companies such as Smith & Williamson working alongside the adviser market.”
A greater focus on fees and liquidity
Simon Elliott, Head of Investment Trust Research at Winterflood Securities said: “Following RDR, investment management fees have been aggressively re-priced and independent boards have been instrumental in ensuring that their shareholders in investment companies benefit from the most competitive rates. This is a trend that looks set to continue.
“That said, we are increasingly concerned that the wider investment industry seems to be competing increasingly on price alone, a trend driven by the larger groups, many of whom have substantial passive businesses. We believe that active investment management remains legitimate and that fund managers can be incentivised to perform through the provision of performance fees.”
Alan Brierley, Director, Investment Companies at Canaccord Genuity said: “In terms of fees, there is no room for egregious fees and fee structures, and we welcome a compression of fees in recent years. We would look to boards to continue to deliver value.”
"Following RDR, investment management fees have been aggressively re-priced and independent boards have been instrumental in ensuring that their shareholders in investment companies benefit from the most competitive rates."
Simon Elliott, Head of Investment Trust Research at Winterflood Securities
Rachel Beagles, Chairman of the Association of Investment Companies said: “The aggregated cost disclosures under MiFID II, which distributors must now make from January 2019, will continue to focus the attention of platform users, advisers and private wealth managers on the costs and charges that their clients are bearing. Consequently, it’s hard to see the focus on costs and fees letting up. If anything it’s likely to increase. In addition to this, the consolidation within the private wealth management industry, and increased use of model portfolios and recommended lists, has produced greater focus on liquidity. So the focus on scale has never been greater. Investment companies will either need to demonstrate scale, and the benefits of increased liquidity and lower costs and charges, or clearly offer investors a differentiated investment opportunity, using the investment company structure, to succeed in this environment going forward.”
John Newlands, expert on investment companies and their history said: “As to fees, while the general downwards trend is to be commended, I see no sense in base fees on say the first £200 million being so low that the proposition is neither attractive nor financially viable for fund managers. The way ahead must be the greater use of tapering, such that fees fall away to 0.3% or even lower on higher total assets. Scottish Mortgage has set a fine example in this regard and arguably drawn in new investors - and thereby gained additional total fees - as a result and permitted share issuance at a slight premium. What’s not to like about that?”
"In terms of fees, there is no room for egregious fees and fee structures, and we welcome a compression of fees in recent years. We would look to boards to continue to deliver value."
Alan Brierley, Director, Investment Companies at Canaccord Genuity
Education: still more work to be done
Simon Fraser, Chairman of F&C Investment Trust said: “The financial services industry needs to create simple-to-use, transparent products that help everyone secure their financial futures in the long term. We are particularly focused on helping millennials access long-term solutions to help them achieve their ambitious plans. Our studies show that two in three 18-to-35-year olds have ‘traditional’ life goals but half of them do not hold any long-term savings or investment products. We also know a quarter of this group want help or education with investing. We’ll be working with a number of national educational institutions and non-profit organisations to deliver on this in the year ahead.”
