By Annabel Brodie-Smith
Last time we talked the open-ended fund, Woodford Equity Income, had just suspended. Over a month later, the fund is still suspended and is continuing to dominate the headlines. The Treasury Select Committee has questioned Andrew Bailey, Chief Executive of the FCA on the events that led to the suspension and the FCA are now running an investigation on this. The committee wrote to Hargreaves Lansdown and received information from them as to why they had included Woodford Equity Income in their Wealth 50 list.
Particularly pertinent were Bank of England boss, Mark Carney’s, comments that open-ended funds that invested in hard-to-sell assets were “built on a lie.” Yesterday, the Bank of England announced that it was concerned that open-ended funds investing in hard-to-sell assets could have a widespread impact on the financial system. They are considering rule changes for this type of open-ended fund along with the FCA. Which brings me again to the highly important structural difference between open-ended funds and investment companies. Sorry to harp on about this but as you can see it's crucial. Investment companies, with a closed-ended structure, are particularly suitable for investing in hard-to-sell (illiquid) assets like unquoted companies and property. This is because investment company shares are bought and sold on the stock exchange so managers do not have to worry about money coming in or leaving the fund. The managers can focus solely on the long-term performance of the investment company. If there is negative news, the investment company’s share price will fall but the portfolio will be unaffected. Investors may not like the share price but they can sell their shares if they wish to.
Open-ended funds do not work well for hard to sell assets. This is exemplified by Woodford Equity Income, which should have had only 10% of these assets in its portfolio but was still forced to suspend. Open-ended fund managers have to manage their portfolios to accommodate inflows and outflows, ensuring they have enough money available to give investors back their money. When sentiment is negative, open-ended fund managers cannot sell the illiquid assets quickly enough to meet investor redemptions, despite retaining a cash cushion for these situations. An open-ended fund is forced to suspend trading so investors cannot buy or sell. This inevitably brings bad publicity to the open-ended fund which is not helpful when it opens to trading again.
Which brings me to investment companies which invest in infrastructure projects, an asset which, of course, is hard to buy and sell, and so ideally suited for the investment company structure. The Infrastructure and Renewable Energy Infrastructure investment company sectors have grown over 700%, in the last ten years and that looks set to continue. These sectors received £1.4bn of the record £4bn raised by existing investment companies in the first six months of the year. Watch our video below where I talk to Giles Frost from INPP, Philip Kent manager of GCP and Frank Schramm, co-CEO of BBGI about the benefits of investing in infrastructure. Also take a look at our article where we include the views of HICL’s, Harry Seekings.
Infrastructure investment company managers Giles Frost – INPP, Philip Kent – GCP and Frank Schramm – BBGI, discuss the benefits of investing in infrastructure.
Moving on, our investment expert, Ian Cowie, spills the beans on how he has selected investment company shares for his personal portfolio “over the last quarter century or so.” He digs into the detail of share price performance, discounts and premiums, looking under the bonnet of reports and accounts, factsheets and income. As Ian says: "Either way, a well-informed investor should make better decisions. The more you look, the more you will see.”
We are also taking a look at the longest-serving investment company managers and it’s positive news that half of investment companies have been managed by the same person for 10 years or more. Some have been at the helm for far longer with the legendary Peter Spiller as the longest serving manager with a 37-year record at Capital Gearing. I often bump into him on his way into the office early at Lancaster Gate tube - I think he’s got more energy than me! Following hot on his heels is Simon Knott, manager of Rights & Issues for 35 years, Hugh Young, who has helped manage Aberdeen New Dawn since its launch 30 years ago and James Henderson, manager of Lowland for over 29 years.
Finally, you may be interested in the MoneyWeek Wealth Summit taking place in London on November 22nd. An interesting group of high-profile speakers will be presenting – Jim Mellon, James Anderson (Scottish Mortgage), David Stevenson, Russell Napier and Sir Steve Webb (Royal London). For further details including ticket prices click here.
Not long until the lazy days of August kick in (I hope). My children are already living the life of Riley and are off to Toronto next week to stay with their aunt and family for two weeks. I am working away until mid-August when I have nothing planned for two weeks – bliss... Hopefully, the weather will stay sunny and the beach will come to the River Thames and Oxfordshire.
Compass will be back in September. Wishing you a wonderful summer.
Annabel Brodie-Smith Communications Director, AIC
