Nobody launches a sector review for a laugh. Like recarpeting your bedroom, you’ll only overhaul your sectors every now and again.
The last occasion was in 2014, when the AIC aligned some of its sector names to the Investment Association’s, to allow investors to ‘look across’ open-ended and closed-ended funds when selecting, let’s say, a UK equity income fund.
But full alignment with open-ended sectors isn’t possible, chiefly because closed-ended funds invest in such a wide range of things that simply don’t appear in the open-ended universe.
The portion of investment company assets invested in alternatives has expanded from around one-fifth 20 years ago, to nearly half today. The rate of change over the past ten years or so has been particularly rapid, as new asset classes have proliferated like dairy alternatives in your local supermarket (hemp milk, anyone?)
"The portion of investment company assets invested in alternatives has expanded from around one-fifth 20 years ago, to nearly half today."
The debt sector is a perfect example. Created in 2006, it has ballooned to 30 companies, investing in everything from convertibles to CLOs, mortgages to P2P loans. In fact, it is the second largest AIC sector by number of companies (following VCT Generalist, which has 39).
So we’ve broken it up. Companies in the current Debt sector will migrate to four new sectors: Debt – Direct Lending, Debt – Loans & Bonds, Debt – Structured Finance and Property – Debt – allowing investors to better understand what the different companies are investing in, and compare them more readily against their peers.
That’s not to say it was an easy process. There’s more than one way to skin a cat, and considerably more ways than that to subdivide the debt sector. Different suggestions were considered, and their merits weighed carefully before the final decision was reached.
If you’re still reading, I’m guessing you’re really interested in the AIC’s sector review. So I can tell you that it was all overseen by the AIC’s Statistics Committee, a dedicated body of top analysts, brokers and other industry experts who meet regularly to discuss data, and our indefatigable Statistics Director, David Michael. Their deliberations are informed by close consultation with the AIC’s 359-strong membership.
Not everything has changed, and not all changes are radical. But cosmetic changes can still be very welcome. I, for one, will be glad never again to have to refer to the “Sector Specialist: Infrastructure – Renewable Energy” sector. Its new name, “Renewable Energy Infrastructure”, is a vast improvement.
Reflecting on the sector changes as a whole, I’m struck with the biblical truth that there is nothing new under the sun. For example, our new Royalties sector recalls some of the earliest investment companies that invested in mineral rights. Renewable Energy Infrastructure may be new – but infrastructure most certainly isn’t: an investor of 1880 could have bought shares in the Globe Telegraph and Trust Company, the Railway Debenture Trust or the Submarine Cables Trust. And you only have to think for a moment about the name of Scottish Mortgage Investment Trust (launched in 1909) to realise that our Property – Debt sector is not breaking entirely new ground.
As for the new debt sectors, the instruments may be new but the idea of pooling investors’ funds to invest in loans and bonds goes back to the first investment company of all, F&C Investment Trust, launched in 1868.
So, perhaps the correct response to the AIC’s sector review is not the battle-cry of “Vive la révolution!” but a classic Gallic shrug as we mutter, “Plus ça change, plus c'est la même chose…”
Nick Britton, Head of Intermediary Communications, AIC
P.S. Last night, the AIC’s communications team were delighted to collect the award for Press Team of the Year at the Headline Money Awards. It’s a proud personal moment for us, but more importantly, a boost for investment companies as we continue our mission to make them better understood and more widely used.
Upcoming events around the UK
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21 May-20 June
Investment trust workshops (14 UK locations)
Providing a comprehensive introduction to investment trusts in a friendly and practical way, the AIC’s workshops have been very highly rated by previous attendees. We are visiting 14 locations around the UK including Birmingham, Derby, Edinburgh, Glasgow, Leeds, Liverpool, Manchester, Newcastle and Swindon. See a full list of locations and dates.
Swimming with the tide
Full details of the AIC's sector shake-up
The AIC has revamped its investment company sectors following an industry-wide consultation. Its new list of sectors and constituents comprises 13 new sectors, 15 renamed sectors and 31 sectors which are unchanged. The sector reorganisation takes effect from Tuesday 28 May 2019.
The changes follow a year-long review of investment company sectors which was overseen by the AIC’s independent statistics committee of brokers, research analysts and data providers. The AIC conducted the review in consultation with its members to ensure its investment company sectors were as clear and helpful as possible for investors.
Several of the new sectors reflect the greater numbers of investment companies investing in alternative assets. The amount of money invested by investment companies in alternative assets has grown by 92% over the past five years, rising from £39.5 billion in 2014 to £75.9 billion in 2019. For example, Sector Specialist: Debt has been separated into three new sectors, Debt – Direct Lending, Debt – Loans & Bonds and Debt – Structured Finance. Similarly, companies in the Property Direct – UK and Property Specialist sectors have been reclassified as Property – UK Commercial, Property – UK Healthcare, Property – UK Residential or Property – Debt.
To accompany the revised list of sectors, the AIC has issued new sector descriptions so investors can easily understand what each sector invests in. The AIC has also published detailed explanations of each sector’s characteristics.
Ian Sayers, Chief Executive of the Association of Investment Companies (AIC), said: “We undertook this review to ensure that investment company sectors accurately reflect the shape of the industry today. Recent years have seen significant growth in investment companies investing in alternative assets, such as property, debt and infrastructure and the emergence of new asset classes such as leasing and royalties.
“Our new sectors allow investors to find and compare companies with similar characteristics easily. I’m confident the new sectors will play a useful role in helping inform investors’ decisions.”
Click on the tables to enlarge.
Click here to see all sector descriptions.
Buying the dips
Ian Cowie updates us on changes to his portfolio during a turbulent market period
Shareholders enjoyed a sparkling start to 2019 as global stock markets recovered from 2018’s anxious autumn. Share prices’ roller coaster ride is not necessarily over yet but the sharp recovery seen this spring and early summer demonstrates there are risks involved in being out of markets as well as being invested in them.
Fears of a trade war between both the world’s biggest economies - America and China - prompted a global sell-off at the end of last year. The Standard & Poor’s 500, a broad measure of the American market, fell from 2,925 at the start of last October to 2,351 on Christmas Eve; a fall of nearly 20%. Since then, the S&P has bounced back by more than 25% to 2,946 at the time of writing.
Similarly, what became known as ‘Red October’ - in a reference to the colour of falling share prices on brokers’ screens - saw the FTSE 100 index of Britain’s biggest shares lose 12% of its value in the final months of 2018, since when it has risen by the same percentage.
"Share prices’ roller coaster ride is not necessarily over yet but the sharp recovery seen this spring and early summer demonstrates there are risks involved in being out of markets as well as being invested in them."
While there is no guarantee the excitement is over yet - indeed it might be unwise to assume so - your humble correspondent is glad he took the chance to top-up existing holdings in six investment companies during this turbulent period. First, I bought shares in Fidelity China Special Situations (stock market ticker: FCSS) and JPMorgan US Smaller Companies (JUSC) last October, in the hope these two great countries can eventually settle their differences and get back to business as usual. I also topped up FCSS again in January.
Then I rebooted Polar Capital Technology (PCT) - one of my top 10 shareholdings by value - in February, reinvesting some dividends that had accrued elsewhere. The following month, I topped up Vietnam Enterprise Investments (VEIL), a share I have only held since last July but which may benefit from the America/China dispute; it’s an ill wind that blows no good. I also bought more shares in FCSS again in March.
April and a new tax year saw me make substantial investments in two other top 10 shareholdings; Baillie Gifford Shin Nippon (BGS) - a Japanese smaller companies specialist - and Worldwide Healthcare Trust (WWH), a fund which does what it says on the tin.
Buying on the dips may not be the most sophisticated investment strategy - and won’t necessarily pay off in the short term - but it is surprising how frequently it has worked for this long-term investor over the last three decades. Buying low is often - but not always - the first step toward making a profit.
There was also some reassurance to be had from seeing other investors find value despite market shocks and uncertainty. Since the start of this year, nearly £2.2bn has been raised by investment companies issuing new shares. That’s a 30% increase on the first four months of last year.
This included The Renewables Infrastructure Group (TRIG) which raised £302m for clean energy investments in March; Tritax Big Box (BBOX), which raised £250m for warehouses in February; and - in the same month - another renewable energy fund, Greencoat UK Wind (UKW), which raised £131m.
Whatever happens elsewhere, the wind will probably continue to blow and we may need warehouses to store all the stuff we buy online. Other commercial activities, in a myriad of forms, are also likely to go on, regardless of stock market shocks.
As 2019’s sparkling spring and early summer have shown, share prices can rise without warning and may recover as quickly as they fell. While the short-term outlook for investors is always uncertain, the medium to long-term view is often reassuring.
Riding the storm
David Prosser takes a look at the recent furore over Neil Woodford’s Patient Capital Trust
It isn’t always easy to follow even the most straightforward investment advice. We routinely tell people considering putting money into the stock market that they must be prepared to take a long-term view – that they shouldn’t even consider equities if they have no stomach for short-term volatility. Fine in theory, but when the volatility actually arrives, it takes nerve to stay put.
This is the dilemma facing investors and advisers with exposure to Neil Woodford’s Patient Capital Trust. As the fund celebrates the fourth anniversary of its launch, the media is full of analysis of the rocky road down which the fund has travelled. With shares in the fund 20 per cent or so down on their price at launch, a good deal of that analysis is of the “Should I stay, or should I go?” variety.
There isn’t a right answer to that question. Ultimately, every investor must make their own decision, based on their own views about the prospects for the fund – and, of course, their personal circumstances.
Still, given that for most investment pundits who dole out that advice about taking the long-term view, five to 10 years is a typical definition of what they mean, complaining about performance after only four years feels a little churlish. All the more so given that this fund doesn’t invest in mainstream, blue-chip equities; rather, much of its portfolio is invested in small enterprises that Mr Woodford hopes will one day make it big. Such businesses can – and have – blow up spectacularly. Equally, they can deliver spectacular returns.
"Ultimately, every investor must make their own decision, based on their own views about the prospects for the fund – and, of course, their personal circumstances."
The clue with this fund is in the name. When it comes to early-stage companies, patience is required. Investors allocating their cash to such businesses must be prepared to be sanguine about setbacks and to stick it out until the portfolio stars come good.
Thank heavens for one very early decision Mr Woodford made. In developing this fund, he chose to launch it as an investment company, rather than an open-ended product. That has proved a wise move, enabling the fund to cope with investor unrest without having to liquidate assets.
Indeed, while the trust’s shares are off 20 per cent since launch, the underlying value of the portfolio is down by only 3 per cent or so. Although the discount at which the shares trade relative to the value of the fund’s assets has slipped ever wider as a result of investors selling up, losses haven’t been locked in. If and when investor confidence in the fund returns, there will be a double benefit as asset prices recover and the discount narrows.
In an open-ended structure, by contrast, Mr Woodford might now be facing the prospect of selling assets to meet redemptions, plunging the fund into a vicious circle of decline. That would be a much tougher position from which to recover.
None of which is to say Patient Capital necessarily will come good, though Mr Woodford says he is excited about the near-term potential of several businesses in the portfolio to hit the big time. However, the lessons of the Patient Capital story are clear. If you’re going to invest in equities, particularly a fund very deliberately sold as a long-term play on early-stage companies, don’t be surprised when your patience is called upon. Equally, look for a fund structure appropriate to this kind of exposure – an investment company has a string of advantages in this context.