By Annabel Brodie-Smith
At the AIC we’ve been talking “bout a Revolution” for a while. Yes I’m humming the Beatles song as I write this. It’s taken a year and at times it’s been painful but this week we have announced an overhaul of the AIC investment company sectors following an industry-wide review.
A sector review is a bit like dismantling a lego rocket and reconstructing it into a fire station without losing any pieces and that’s not easy! But we have reached a conclusion and from the 28th May we will have 13 new investment company sectors,15 renamed sectors and in total 90 companies will have moved sector. The new sectors reflect the supersonic growth in alternative assets, up 92% over the past five years.
So our two Property sectors have become Property – UK Commercial, Property – UK Healthcare, Property – UK Residential or Property – Debt. Our 29-company Debt sector has been separated into three separate sectors. A new Growth Capital sector for companies which invest in unquoted companies but do not take controlling stakes and a new Royalties sector have been created. Away from alternatives, there are three new Asia Pacific sectors and a new Technology & Media sector. Find out more about who has switched sector here.
After the sell-off at the end of the year, it’s been a ‘sparking start to 2019’ and our esteemed investment correspondent, Ian Cowie, has been busy topping up existing holdings in six investment companies. He explains there is no guarantee that the stock market excitement is over but buying on the dips has worked for him over the long term. And there’s some reassurance that other investors are finding value with nearly £2.2bn raised by existing investment companies issuing new shares since the start of the year. This swift turnaround clearly demonstrates, “share prices can rise without warning and may recover as quickly as they fell”.
In addition, money journalist David Prosser looks at why investment companies are suitable for pensions. Interestingly, stockbroker AJ Bell recently revealed that six of the 10 best-selling investment funds amongst their pension savers proved to be investment companies. Many savers are also using investment companies to supplement their income in retirement and this is why we launched Income Finder last month to help investors easily research income-paying investment companies. Build a virtual portfolio so you can see which months your companies pay income and how much income you would have received over the last year.
The AIC will be at the Mello Investment Trust & Funds Day next week on Wednesday 15th May in Chiswick at the Clayton Conference Centre. Sadly, I am in Guernsey but it looks like a great line-up and my colleague, Nick Britton, will be presenting alongside other investment company managers and experts. There is a special last-minute offer for Compass readers where you can buy tickets for the Trusts & Funds Day for just £10 using the discount code Compass10. Just follow this link and input the code to secure your place.
Finally, I’m a bit croaky today because on Wednesday the AIC’s communications team won 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.
After Wednesday's festivities, I’m looking forward to an early night. Have a good month!
Communications Director, AIC
Shaking it up
Full details of the AIC's revolutionary sector changes
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 28th 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.
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.
Riding the waves
Ian Cowie makes the most of turbulent market conditions
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.
A perfect pension?
David Prosser tells us why smart pension savers choose investment companies
What’s the best way to save and invest inside a pension plan? Pension savers benefit from generous tax breaks that automatically give their retirement funds a boost, but to really maximise your income later in life, you need to earn the best possible returns on your contributions. The pension freedom reforms of four years ago add another dimension to this debate. These days, the majority of savers tend not to buy an annuity paying a guaranteed regular income when they want to start cashing in their funds, at least initially, preferring instead to draw money directly from their savings. In which case, you’ll need to have suitable investments in place for this period of your life.
Before and after
In other words, investing through a pension is now a two-phase process. In the first phase, you’re trying to build up as big a fund as possible for retirement – financial advisers call this the “accumulation” phase. Stage two – sometimes called “decumulation” in the jargon – is to invest in such a way that you can preserve and even build up further capital, while also taking an income from your savings.
Those are two quite different objectives, but this doesn’t necessarily mean you need completely different investments before and after your planned retirement date. It’s often possible to use investments chosen primarily with capital growth in mind to generate an income. Equally, investments that generate generous amounts of income are often good options for growth, since you’ll typically be able to re-invest the income back into your savings.
So, which investments might fit the bill? Well, in a survey published by the stockbroker AJ Bell recently, six of the 10 best-selling investment funds with pensions savers proved to be investment companies – even though there are far fewer of this type of fund around than unit trusts and other similar “open-ended” funds. Investment companies appear to be punching well above their weight when it comes to pension savings.
A fund for all seasons
There are good reasons why smart pension savers are likely to be found using investment companies. Most obviously, independent analysis suggests these funds tend to produce bigger investment returns over the longer term. One study published by Cass Business School last summer showed investment companies had returned an average of 0.8 percentage points a year extra between 2000 and 2016; over 30 or 40 years of saving for retirement, that makes a massive difference.
Once you reach the stage of drawing an income, moreover, investment companies can work very well. Unlike other types of investment fund, they’re allowed to keep back some of the income they earn on their underlying investments each year in order to fund pay-outs to investors in years when less income comes in.
This means investment companies can make reliable – and often rising – income distributions to savers, which is useful if you’re trying to live off your investment income in retirement. In fact, there are now more than 40 investment companies that have raised their dividend in each of the past 10 years; in some cases, that record goes back 50 years.
"There are good reasons why smart pension savers are likely to be found using investment companies. Most obviously, independent analysis suggests these funds tend to produce bigger investment returns over the longer term."
Now that the new tax year is underway – 2019-20 began on 6 April – it’s important to think about how to use your pension savings allowance over the next year. The general rule is that you can invest up the value of your earnings or £40,000 (whichever is lower) in a pension each tax year, though the maximum is lower for very high earners. But even if you have no income at all, you can still put up to £3,600 into a pension each year.
These sums sound out of reach to many savers but remember that you’ll receive tax relief on your contributions, reducing the cost. You may also be entitled to contributions from an employer. In any case, even small amounts of savings will add up over time, particularly if they’re well invested.
Regular saving works really well with pensions. You’re investing consistently over an extended period, plus you get the benefit of a statistical quirk known as pound-cost averaging. The principle here is that your fixed monthly contribution buys more of any given investment in months when market prices have fallen, swelling your returns during the recovery period. The effect is to smooth out the ups and downs of the markets.
If you already have a SIPP (Self-Invested Personal Pension) set up, you can pick investment companies through an online fund supermarket. You can find out more about SIPPs in the AIC's guide 'Taking control of your future'.