Faith Glasgow analyses the investment company trends in 2022.
New Year has come and gone, and we’ve breathed a collective sigh of relief that 2022 is behind us. Most shareholders, in investment companies in particular, are hoping for better things this year after the torrid experiences of the last 12 months.
Yet as the AIC’s round-up of some of the key activity in the sector shows, despite difficult market conditions, soaring inflation, rising interest rates and political turmoil, closed-ended funds were very much alive and kicking in 2022.
For a start, even in the face of such short-term challenges, investment companies raised a respectable £5.3 billion during the year; practically all of it was in the form of secondary fundraising by existing companies, as nervous investors sought the reassurance of established track records. In comparison, 2021’s buoyant markets saw a record-breaking £10.8 billion achieved through secondary fundraising.
More than a quarter of the total raised was generated by funds in the renewable energy sector, which boomed as wider energy prices spiraled. As Andrew McHattie, publisher of the Investment Trust Newsletter, observes: “The need to build out the UK’s new power infrastructure is ongoing, so this thirst for extra capital to fund attractive new opportunities is likely to continue for some time.”
Remarkably considering the turbulence of the past year, investment companies’ total assets amounted to £265.4 billion at the end of 2022, only 4% down on November 2021’s record high of £277.6 billion.
Merger activity continued apace within the investment company sector, with the completion of five mergers in the course of the year – in line with 2021. It’s an indication of the continuing pressure on the boards of many equity trusts in particular to attract more capital, cut costs through economies of scale and strengthen resources.
Yet mergers are hard work and cannot be undertaken lightly. Says McHattie: “Boards have explained just how difficult and time-consuming mergers can be, so it takes some determination to see them through.”
Sometimes, he adds, “they amount to simple common sense”. Independent Investment Trust, for instance, merged with Baillie Gifford heavyweight Monks Investment Trust after IIT managing director and portfolio manager Max Ward, himself a former BG employee, decided to retire.
Certain trusts – JPMorgan Global Growth & Income being the most notable example this year – also appear to have a knack for gathering assets from smaller trusts in their sector. JGGI merged with Scottish Investment Trust in September and bought its own stablemate, JPMorgan Elect, just before Christmas.
Changes in management mandates were few and far between in 2022. Only two took place: Global Opportunities Trust became self-managed, while Rights & Issues appointed Jupiter following the retirement of Simon Knott, who had run the portfolio since 1984.
“In choppy markets it can be more difficult to discern whether asset underperformance is due to the manager’s strategy or to other extraneous factors beyond their control,” explains McHattie. “In that environment there usually has to be a fairly cut-and-dried reason to make a change.”
However, there was much more activity on the fee front, as a total of 27 investment company boards made changes to their charging structures to benefit shareholders.
Fee reductions have been in evidence across the industry for a few years now, spurred on by increasing competition for retail custom. As McHattie observes: “In a competitive environment there is plenty of scrutiny on those who are charging more than their peers.”
He makes the point that the investment company industry is far more transparent than many other forms of asset management, underpinned by the scrutiny of the independent boards whose job it is to ensure value for money for all investors.
“Having said that, though, some sectors such as private equity will always likely be more expensive to manage, because the burden of work, due diligence and research is more involved,” he adds.
The changes introduced in 2022 took various forms: 11 companies negotiated a lower base fee, four introduced tiered fees, 10 reduced fees within an existing tiered structure, and three abolished performance fees.
For instance, Troy Income & Growth has replaced its fixed 0.65% management fee with a tiered arrangement, starting at 0.55% on net assets of up to £250 million and falling to 0.5% above that.
F&C Investment Trust already had a tiered fee structure in place, but has simplified it through the phased reduction of the lowest tier (from 0.35% in 2021 to 0.3% as of the start of 2023). As Beatrice Holland, chair of F&C, observes, the fee structure “is designed to bring down our cost ratios as the company grows, and to pass the benefits of scale on to shareholders”.
CT Global Managed Portfolio Growth is an example of an investment company that removed its performance fee last year, in line with a trend that has been evident across the sector in recent years. “Both the board and the manager believe this to be in shareholders’ best interests,” comments the company.
2022 was definitely not an easy ride, but hopefully the changes instigated during that time will pay off for investors in 2023 and beyond.