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Listed funds: adaptability key to future success

Having spoken recently on a panel at the London Stock Exchange Group’s Annual Investment Fund Conference, Simon Gordon, Director – Fund and Corporate Services, explores the investor landscape for listed funds, what we learned in 2018 and why he is still optimistic about the industry in 2019 and beyond…

“Investment Trusts listed on the London Stock Exchange have been in existence for over 150 years. Of course, over that time the sector has experienced some exceptionally good years and some when activity has been less buoyant – the first such vehicle, Foreign & Colonial, has, for instance, weathered many financial and political storms in that time.”

“It remains the case, though, that listed, closed-ended vehicles generally outperform open-ended funds and continue to be an attractive proposition. So what was 2018 like, what changes are afoot and how is 2019 shaping up for the sector?”

A Strong Year

“In 2018 there were 22 Investment Trust IPOs, reflecting on the whole a strong year. The alternative asset classes in particular gained real momentum, with the ever-adaptable Investment Trust structure being used to buy assets ranging from future music royalty streams (Hipgnosis Songs Fund Limited) through to innovative renewable energy infrastructure assets (Gore Street Energy Storage Fund plc, Gresham House Energy Storage Fund plc).”

“There was a flip side to all this activity, though – with so many IPOs in the first three quarters of the year, the last quarter of 2018 proved to be a far more difficult capital raising environment. As a result, a number of investment trust IPOs were either pulled completely or had to issue scaled back Prospectuses with a view to going back to the market quickly in 2019 – something we are now seeing.”

“There were some interesting questions around investor type in 2018 too – the alternative fund IPOs last year were largely seeded by institutional money rather than retail investors and wealth managers. Common sense would suggest that long-term, inflation-linked income would be attractive to retail investors, so why was that not the case? Perhaps the managers of alternative funds need to be more innovative or simply more active in their communication and marketing initiatives.”

“Meanwhile, 2018 was also another strong year for secondaries with many traditional equity trusts successfully issuing new shares. This is not surprising – there are some great traditional equity trusts out in the market, whilst the fact that managers are often long established with consistent track records gives investors welcome comfort when investing post-IPO. As a result, trusts raising capital in the secondaries market are able to tap into a wider potential investor base.”

“We have also seen the rise of platforms and SIPPs investing into the sector. A number of investment trusts aspire, once they have reached a certain critical mass, to move from Specialist Fund Segment to Premium Segment to tap into these new investor pools.”

Looking Forward: Countering Uncertainty

“For 2019 there is, of course, some uncertainty, a lot of which is to do with the ongoing Brexit saga. Investment Trusts are in many ways insulated from Brexit uncertainty because they are usually (these days) onshore, UK entities with onshore, UK investors. However, it is possible that the location of the assets will have a bearing on the scale of any Brexit-related impact.”

“Other recent developments such as PRIIPS KIDs are also having an adverse effect by shoehorning closed ended funds into an ill-suited model, which can make funds seem more expensive than they are. This is especially problematic to institutional investors, who may have to make investment decisions based on a rigid set of criteria.”

“However, although the start of the year has been a bit slow, we did start to see some pick up in February. The average discount for an investment trust is still quite tight (3-3.5%) despite the uncertainty, which is a good sign, while things like the Prospectus rule changes from 2018 will go a little way to increasing flexibility and making it easier for Trusts to get back out to market.”

“Social media and a more sophisticated approach to relationship building is also coming to the fore, with managers now much more adept at raising awareness of their brand and their investment strategy directly with potential investors. With this, of course, comes a need for a greater degree of caution but, provided any tweets, posts or other announcements do not contradict the Prospectus or give away information that should not be public, it is generally a useful tool.”

“Boards are becoming more tech savvy too, and perhaps part of the explanation for the more sophisticated approach boards are taking when it comes to engaging with potential investors is to do with greater board diversity, which is being driven to a certain extent by governance code changes.”

“As we look forward into 2019 and beyond, boards and managers, supported by their corporate governance advisors and company secretaries, will increasingly have to position their Investment Trusts so that they are prepared for an environment which is putting more and more emphasis on corporate governance. Changes to the Governance Code in 2018 made it abundantly clear that the direction of travel is for Investment Trusts to adopt the same standards of governance as FTSE350 businesses. Many of the exemptions have been rescinded and focus is on things like diversity on boards, stakeholder engagement and board committee make up.”

“Of course, it is a complex overall picture and the outlook for the rest of the year will depend on a number of factors but my view is that, although perhaps not as strong as 2018, it this year will be another good one for the sector.”

“So here’s to another 150 years? Well, who knows, but this is a flexible, adaptive industry. The closed-end structure is inherently attractive, providing permanent capital, governance, ability to leverage and a readily available performance record. I am optimistic.”

JTC has a deep understanding of listing on internationally recognised stock exchanges as well as the ongoing regulatory requirements of administering listed funds and securities.

If you would like to discuss JTC’s listed funds experience please contact Simon directly.

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