This time last month, I was frantically rewriting my Foreword after hearing that Woodford Equity Income had been suspended. No such last-minute panic this time round. If you listen very carefully, you can hear the industry zipping up its suitcase for a long-awaited summer holiday.
Nevertheless, the debate about whether open-ended funds should be holding illiquid assets at all – and if so how much – has not gone away. Mark Carney fanned the flames when he said that open-ended funds holding illiquid assets are ‘built on a lie’. Meanwhile, the Investment Association (IA) has proposed the creation of ‘long-term asset funds’ with limited redemption opportunities – a puzzling half-way house which would appear to dispense with the benefits of the open-ended structure (ready redemption at NAV) while forgoing the advantage of the closed-ended (permanent capital).
If people want access to illiquid assets, closed-ended funds are an existing, proven option, and it has been extraordinary to see the perverse lengths to which parts of the industry (and regulators) will go to avoid recognising this. They seem intent on reinventing the wheel, starting with a square and then shaving off the corners. Perhaps they will end up changing the open-ended structure so much that long-term asset funds will end up becoming closed-ended and join the AIC.
Fortunately, while this rather abstruse conversation about new fund structures is taking place, investors are getting on with their lives. DFMs are switching to closed-ended funds for property, with over half the bricks-and-mortar exposure in their model portfolios now being through closed-ended funds. Meanwhile, open-ended property funds in the IA’s UK Direct Property sector have seen net outflows for each of the past eight months.
Further evidence that investors want their illiquid assets in a closed-ended format comes from the fundraising figures for the first six months of 2019. Four out of five IPOs in the period were for illiquid asset classes, raising £729 million, while £2.9 billion was raised by existing companies investing in illiquid assets (predominantly property, infrastructure, private equity and debt). That latter figure drove a record total £4 billion fundraising for H1 2019 – the highest level of secondary fundraising by investment companies in any six-month period since records began.
To highlight the role that alternative assets can play in portfolios, our training season this autumn begins with two seminars (in Birmingham and London) focusing exclusively on property, private equity, infrastructure and debt. Portfolio managers from each sector will explain the opportunities and the risks, and make a case for their asset class being part of the mainstream.
Picking up the alternatives theme, Spotlight has canvassed the views of infrastructure managers, who explain their different investment strategies and talk about the positive social and economic benefits of what they do, as well as addressing concerns around political risk. And rounding off the newsletter this month is our updated ranking of the longest-serving investment company managers, led by the redoubtable Peter Spiller of Capital Gearing, who offers reflections on his staggering 37-year tenure. I’m starting to wonder if I’m going to retire before Peter does…
Nick Britton, Head of Intermediary Communications, AIC
Upcoming events around the UK
AIC Alternatives Seminar (Birmingham)
Get to know four alternative asset classes – property, private equity, infrastructure and debt. An AIC event held at the Forest of Arden Marriott. 2.25 hours of CPD. Full details.
Investment trusts explored: where next for active managers? (Edinburgh)
This event at Edinburgh’s Bonham Hotel is run by Sub35, a network of wealth and investment managers up to and around the age of 35 (so Nick qualifies... sort of). Speakers include Praveen Kumar, manager of Baillie Gifford Shin Nippon. 1.5 hours of CPD. Join Sub35 for free and register for the event here.
AIC Alternatives Seminar (London)
Get to know four alternative asset classes – property, private equity, infrastructure and debt. An AIC event held at the ICAEW, One Moorgate Lane. 2.25 hours of CPD. Full details.
Two AIC seminars in London and Birmingham are putting alternative assets centre stage
The AIC is often asked by advisers and wealth managers to run more training on alternative assets. Interest has only increased in recent years, following the suspensions of several open-ended property funds after the EU referendum and of course the events of recent weeks, which have focused attention on which fund structures are right for which assets.
In response to this demand, the AIC is running two seminars in the autumn focusing on property, private equity, infrastructure and debt. The free training events are aimed at advisers and wealth managers who wish to understand more about these asset classes and how to access them using closed-ended investment companies.
Just over a third of investment company assets (£65 billion) are invested in property, infrastructure, private equity and less liquid forms of debt. Over the past ten years, the majority of new funds raised by investment companies through IPOs and secondaries has been in these sectors and others that invest in illiquid assets, such as leasing and royalties.
While advisers and wealth managers recognise these trends, they quite rightly want to get a better understanding of the risks of these asset classes as well as the benefits. These seminars will explain how managers of closed-ended funds seek to cherry-pick the very best opportunities in illiquid asset classes.
Details of the AIC Alternative Seminars
Hosted by Nick Britton, Head of Intermediary Communications, the seminars will be held in Birmingham on 18 September and in London on 10 October. A portfolio manager representing each of the four alternative asset classes (debt, infrastructure, private equity and property) will speak at each seminar.
The seminars are designed to provide at least 2 hours 15 minutes of structured CPD and are endorsed by the CISI. Their learning objectives are as follows:
• Identify some of the main opportunities and risks presented by four alternative asset classes (direct property, private equity, infrastructure and illiquid debt) and the roles they might play in portfolios
• Explain how closed-ended investment companies access these asset classes
• Understand the specific strategies of four portfolio managers investing in these asset classes
The BIRMINGHAM seminar will be held on Wednesday 18 September 2019, from 11.30 to 14.30, at the Marriott Forest of Arden, Maxstoke Lane, Meriden CV7 7HR. The guest speakers are: Jason Baggaley (Standard Life Investments Property Income), Phil Kent (GCP Infrastructure Investments), Andrew Lebus (Pantheon International) and Pietro Nicholls (RM Secured Direct Lending).
The LONDON seminar will be held on Thursday 10 October 2019, from 09.00 to 12.00, at the ICAEW, One Moorgate Lane, London, EC2R 6EA. The guest speakers are: Ron Miao (Hadrian’s Wall Secured Investments), Emma Osborne (ICG Enterprise), Chris Tanner (John Laing Environmental Assets) and Steve Windsor (Supermarket Income REIT).
Spotlight readers who wish to reserve a free place at one of the seminars can book via the AIC website, or by contacting Debra Gibbons on 020 7282 5572 or by email.
Online training on property and private equity investment companies is also available on the AIC’s website within Learning Zone, the organisation’s e-learning portal. A further course on infrastructure investment companies will be released soon.
All of the AIC’s online training is free of charge and accredited by professional bodies, the Chartered Institute for Securities and Investment (CISI) and the Chartered Insurance Institute (CII).
Managers look at the demand, benefits and political risk associated with infrastructure investment
Over the last ten years the Infrastructure and Renewable Energy Infrastructure investment company sectors have grown by over 700%, from £2.04bn of assets (4 companies) in June 2009 to over £16.7bn of assets (17 companies) at the end of May 2019, demonstrating strong demand. However, over the last two years, the political debate about the funding of infrastructure has intensified, with no new projects to be implemented under the Private Finance Initiative (PFI) and Labour’s nationalisation policies gaining media coverage.
To better understand how the sector's portfolio managers navigate its opportunities and risks, we have quizzed Frank Schramm, co-CEO of BBGI S.A., Giles Frost, manager of International Public Partnerships, Philip Kent, manager of GCP Infrastructure Investments, and Harry Seekings, co-head of infrastructure at InfraRed Capital Partners which manages HICL Infrastructure. Their answers are collated below.
Can you explain your investment strategy?
Frank Schramm, co-CEO of BBGI S.A., said: “We often joke that boring is beautiful and we have a ‘boring’ investment strategy which has worked well for us since going public in 2011. It has allowed us to deliver compounded returns in excess of 11% per annum. We have a low risk, long-term investment policy and, as a globally diversified infrastructure investment company, we provide responsible capital to build and maintain transport and social infrastructure. Our typical investments include roads, schools, hospitals and justice facilities and we are typically paid by highly rated government counterparties for delivering and maintaining important infrastructure. An example of one of our projects is the Ohio River Bridge Project in Indiana/Kentucky, US. Together with the government and our partners, we have delivered a new 760m long cable-stay bridge, 500m twin vehicular tunnel and associated road network that has reduced travel times and improved the flow of goods and people in the region.”
Giles Frost, manager of International Public Partnerships (INPP), said: “INPP provides responsible investment in public infrastructure to support the delivery of essential public services. Whether the infrastructure required is for schools, court buildings, power transmission, transport or wastewater, our purpose is to support the needs of society and the environment for both today and tomorrow. Our horizons are long-term, where we seek to generate highly predictable portfolio performance by investing in a combination of low-risk infrastructure assets which produce long-dated, contractual cashflows. In turn, this allows us to provide our investors with long-term, inflation-linked returns either to provide reliable long-term income or an effective liability match.”
Philip Kent, manager of GCP Infrastructure Investments, said: “GCP Infrastructure seeks to provide investors with regular, sustained, long-term dividends and to preserve capital over the long term through exposure to a diversified portfolio of UK infrastructure debt and similar assets. It primarily targets investments in infrastructure projects with long-term, public sector-backed, availability-based revenue projects across the renewable energy, PFI and supported living sectors. A recent example includes the company’s £80m investment in Race Bank, an operational 573MW offshore wind farm located off the coast of Norfolk. Race Bank’s 91 turbines are forecast to provide enough renewable energy to power over half a million UK homes.”
Harry Seekings, co-head of infrastructure at InfraRed Capital Partners, investment manager of HICL, said: “HICL invests in infrastructure assets at the lower end of the risk spectrum – often referred to as ‘core infrastructure’. These assets are usually located at the heart of local communities, they have monopolistic features and facilitate the delivery of public services. HICL’s three key market segments are: Public-Private Partnerships (PPPs), where there is a contract with public sector counterparties to provide social infrastructure (e.g. a school or a hospital) in return for a long-term, steady and contracted revenue stream; demand-based assets where revenues vary with volume or usage, the best example being a toll road; and regulated assets, where returns to investors are set by an independent regulator, for example a water company.”
What are the benefits of infrastructure investment companies?
Philip Kent, manager of GCP Infrastructure Investments, said: “The closed-ended structure of a listed investment company offers investors daily liquidity in shares exposed to highly illiquid direct investments in infrastructure projects that offer dependable, long-term income. Unlike open-ended funds which need to sell assets or retain cash balances to satisfy selling investors, investors buy and sell investment companies through a live price on the London Stock Exchange. This enables managers to take a long-term view to investing in infrastructure projects, opening the door to greater choice and portfolio diversification whilst substantially reducing portfolio churn.”
Infrastructure investment company managers Giles Frost – INPP, Philip Kent – GCP and Frank Schramm – BBGI, discuss investment strategies, political risks and their outlook for the sector.
Giles Frost, manager of International Public Partnerships (INPP), said: “The type of infrastructure assets INPP invests in are typically very hard to access without the specialist expertise provided by our investment adviser. We originate new investment opportunities ourselves and don’t just rely on government-led procurement to grow our portfolio for us. This means direct infrastructure investment has a high barrier to entry, even for the most sophisticated institutional investors. What listed investment trusts like INPP afford investors is the means to easily access the asset class in a simple, tradable share structure like any other FTSE security. Since listing INPP thirteen years ago, we have seen a democratisation of alternatives allocation as a result.”
“The closed-ended structure of a listed investment company offers investors daily liquidity in shares exposed to highly illiquid direct investments in infrastructure projects that offer dependable, long-term income."
Philip Kent, manager of GCP Infrastructure Investments
What are the positive social and economic impacts of your investments?
Frank Schramm, co-CEO of BBGI S.A., said: “Infrastructure projects can have an immense impact on the local communities and the environment. During the construction of the Mersey Gateway Bridge in the UK, BBGI’s project team established a volunteer scheme including a four-week training programme where people could learn a range of personal development skills. After completion of the course, the volunteers were offered the opportunity to support the project’s visitor centre and help to tell the story of the project to local schools and community groups. The projected long-term economic benefits are expected to include over 4,000 permanent new jobs, regeneration activity and inward investment of over £61m a year in gross value added from new jobs by 2030.”
Harry Seekings, co-head of infrastructure at InfraRed Capital Partners, investment manager of HICL, said: “Economically, the benefits of private capital invested in public infrastructure include risk transfer through construction and/or the operational phase, ring-fenced capital maintenance budgets, and the application of private sector expertise and resource. The benefit to taxpayers of risk transfer, in particular, is significant as it incentivises the private sector to deliver capital programmes within budget and on time; and to keep assets well maintained and operating efficiently.
“Through portfolio companies, HICL invests in physical assets, which are often high-profile and located at the heart of communities, and which support the delivery of public services. Investors in infrastructure must be aware of, and sensitive to, the interests of all the stakeholders. This mindset helps to create long-term, sustainable value for HICL’s shareholders. A recent example of this responsible approach to stakeholder management was the resolution of the issues arising from the Carillion liquidation, which demonstrated the sustainability of the Public-Private Partnership model.”
Philip Kent, manager of GCP Infrastructure Investments, said: “Infrastructure, by definition, includes the provision of assets that serve a public benefit. All infrastructure therefore has direct user benefits, such as improved provision of services such as healthcare or education, reduced journey times associated with transport infrastructure and reduced carbon emissions from renewable energy generation. Further, infrastructure projects also have indirect or dynamic benefits – typically associated with larger projects. GCP Infrastructure invests in renewable, PFI and supported living assets in the UK. By way of illustration, the company has facilitated the operation and/or construction of renewable energy facilities with a total combined output of c.2,500GWh per annum, enough to power nearly 1 million UK homes. Renewable energy projects comprise 60% of GCP Infrastructure’s investment portfolio.”
Giles Frost, manager of International Public Partnerships (INPP), said: “Infrastructure investment is a customer service business. The assets in which we invest have an impact on the daily lives of many people across the world and it is this responsibility we take very seriously. Last year, we held more than 3,000 hours of management meetings with our public sector clients to ensure the smooth operation of our assets, including those schools in our portfolio which provide educational facilities to over 190,000 pupils. We believe in engaged societies and our portfolio provided space for more than 150,000 hours of community use.”
“Infrastructure investment is a customer service business. The assets in which we invest have an impact on the daily lives of many people across the world and it is this responsibility we take very seriously."
Giles Frost, manager of International Public Partnerships (INPP)
What’s your outlook for the infrastructure sector – risks and opportunities?
Harry Seekings, co-head of infrastructure at InfraRed Capital Partners, investment manager of HICL, said: “Political risk is inherent in the business model of infrastructure investment due to the essential nature of the assets and the counterparties involved. Particularly pertinent for the sector is the evolution of thinking on infrastructure financing. InfraRed has contributed to public consultations on the future for delivering infrastructure investment, and is taking a proactive approach to engaging with policy-makers on the benefits to taxpayers that responsibly managed private investment can deliver.”
Frank Schramm, co-CEO of BBGI S.A., said: “Our investment activities involve sourcing and originating, bidding for and winning social infrastructure and other availability-based infrastructure projects. The overall pipeline for availability-style transactions remains generally strong. We will maintain our selective acquisition strategy in assessing any potential new assets and remain confident in our ability to originate investment opportunities. We anticipate these will come from a variety of sources, including a North American strategic partnership, which has already resulted in the acquisition of five operational social infrastructure assets amounting to approximately C$191m.”
Philip Kent, manager of GCP Infrastructure Investments, said: “As infrastructure development is closely tied to government policy that promotes such development (and often relies on the existence of specific government support), political risks are inherent in an infrastructure investment. Political risks span macro risks associated with being exposed to a specific geography and the legislation governing that location, such as corporation tax rates and building regulations. Further, given the direct nature of government support, any changes to support arrangements that are more targeted at a project or sector can have a material impact on the value of infrastructure investments.”
“Political risk is inherent in the business model of infrastructure investment due to the essential nature of the assets and the counterparties involved. Particularly pertinent for the sector is the evolution of thinking on infrastructure financing."
Harry Seekings, co-head of infrastructure at InfraRed Capital Partners, investment manager of HICL
Hands of time
The longest-serving investment company managers revealed
Theresa May announced her resignation as Conservative Party leader on 7 June having been appointed nearly three years before. However, 21 British Prime Ministers had even shorter tenures, including Gordon Brown, Neville Chamberlain and George Canning, who was Prime Minister for just four months in 1827. With a change of leader expected, the AIC has examined the tenure of investment company managers. It finds that half of investment companies have been managed by the same person for 10 years or more.
Out of all AIC member investment companies (ex VCTs) with a track record of 10 years or more, 94 companies (50%) have been managed by at least one of their current fund managers for 10 years or longer. Whilst this is impressive, several managers have track records stretching back much further than that: 19 companies (10%) have been managed by the same manager for over 20 years.
The investment company industry’s longest-serving manager is Peter Spiller, who has managed Capital Gearing for over 37 years. Following close behind is Simon Knott, manager of Rights & Issues for 35 years. Next longest-serving is Hugh Young, who has helped manage Aberdeen New Dawn since its launch 30 years ago. Hot on their heels are James Henderson, manager of Lowland for over 29 years and Richard Newbery and Alistair Whyte, managers of Aberforth Smaller Companies for over 28 years.
Quotes from Peter Spiller, Hugh Young and James Henderson on the lessons they’ve learned and their proudest moments follow below, as well as a table of the top longest-serving managers.
For a complete list of the managers who have managed their investment companies for more than 10 years, click here.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies, said: “Investors are often told they should be thinking long-term, so it’s reassuring to see that so many investment companies have managers with impressively long records. Half of AIC members have had the same manager for at least ten years, and many have had the same manager for much longer. With markets always unpredictable, it’s reassuring for investors that many investment company managers have steered their company through different conditions, experiencing good times and bad.
“Since last year, we’ve seen an additional 13 fund managers celebrate a 10-year anniversary of managing their investment company. With the structural benefits of investment companies, such as not having to deal with inflows and outflows, it’s easy to see why managers might enjoy working on investment companies for long periods.”
Most important lesson learned
Peter Spiller, Manager of Capital Gearing, said: “It is hard to pinpoint a single lesson that will endure: politics, markets, and economies are continuously evolving. No one rule, no one approach, can hope to serve you well over the long term. You must learn to adapt.
“Nevertheless, the old stock market saying – that equities climb by the stairs but go down by the elevator – is very true. It is important for managers never to become complacent after a long period of steady gains.
“The unsustainable will not be sustained but it can take surprisingly long for the inevitable to happen. Excessive debt, high valuations and negative interest rates are all things that, for the time being, meet this description.”
James Henderson, Co-manager of Lowland Investment Company, said: “A key feature of the investment trust structure is the independent board of directors and one of the most important things I’ve learned over my career is the value of the board. The role of the board is to act on behalf of shareholders’ interests, but I’ve also found working with the board to be incredibly beneficial to how I manage money. Over my tenure managing Lowland Investment Company, I have worked with four different chairmen who have each brought their own unique insights to the trust and, at times, tested me as a manager to ensure we get the best for shareholders. Their investment insights and support in the good times – as well as the bad – adds real value.”
Hugh Young, Investment Manager on Aberdeen New Dawn, said: “I’ve been fortunate to be involved with the management of New Dawn since launch, but its success has been truly a team effort. Members of the current team have been involved with the trust for almost 20 years and longer. The longevity and tenure of the team when combined with new people joining, has been crucial. We’ve learnt lessons from past experiences whilst new members of the team have brought fresh perspectives. I hope that the young talent we have coming through in Asia means that the trust will continue to benefit from a mix of young and old heads over the next 30 years.”
Best moment as a manager
James Henderson, Co-manager of Lowland Investment Company, said: “I remember this quite clearly, as it was only a couple of years after I was appointed manager of Lowland. It was in 1992 when the UK left the ERM (Exchange Rate Mechanism). Some might think this a strange moment to pick as one of the best moments, but before we left the ERM businesses in the UK were struggling with high interest rates and sterling and our exit caused interest rates to be cut and sterling to fall, which boosted the UK economy. Throughout this whole period we stuck with the UK and our domestic investments, which was the right thing to do because the boost in the UK economy following our ERM exit gave a real boost to our portfolio. Ironically, we’re now living through a time where the opposite seems to be occurring and trying to break away from the EU is causing suffering to the UK economy, but if we don’t have a hard Brexit there is substantial upside in UK equities.”
Peter Spiller, Manager of Capital Gearing, said: “I had a moment of satisfaction when, earlier this summer, the share price of Capital Gearing reached £42.50 which was exactly 200 times the share price when I took over managing the trust in 1982.”
What keeps you motivated?
James Henderson, Co-manager of Lowland Investment Company, said: “I think it’s important to be aligned with shareholders. When I was appointed manager of Lowland in 1990, I bought shares in the company at £1.70 a share and I’ve added to my personal holding a few times since then. Lowland’s current share price is around £13.50 and in our most recent half-year report the board announced it intends to pay total dividends of around 59p for the year. I not only manage the portfolio for Lowland but have ‘skin in the game’ too, so I understand the importance of continuing to grow both capital and income and am motivated to keep achieving this for our shareholders over the long term.”
Peter Spiller, Manager of Capital Gearing, said: “The extraordinary, not to say, distorted nature of the world economy is an endless source of fascination.”
Longest-serving managers over 20 years (AIC members, ex VCTs) at end June 2019 - Source: Morningstar.