The investment company sector is perhaps best known for some of the larger, long-established, and retail focused investment companies.
But it’s noteworthy that many of the earliest investment companies, firm favorites with investors looking for that ‘one stop investment shop’, were in fact, the original specialist sector funds.
Scottish Mortgage Investment Trust is a case in point. While today it is a globally diversified portfolio, it was originally launched in 1909 to finance rubber planters in what was then known as Malaya. Similarly British Assets Trust, a Global Growth & Income investment company, was formed in Edinburgh in 1897 on an interesting investment niche: the undervalued assets of distressed Antipodean banks and insurance companies.
Both of these remits seem racy even by today’s standards, although with distressed debt funds forming part of todays’ specialist sector launches, it’s interesting to see
an element of history repeating itself.
Of course times have changed and the investment company sectors’ earliest launches today tend to dominate the mainstream sectors such as Global and UK sectors. It is these core, retail focused sectors that still dominate in terms of assets under management. However, today’s ‘specialist sectors’ are beginning to dominate if not the sector, then certainly the lion’s share of new launch activity, with income increasingly becoming a dominant theme.
Indeed Cazenove highlights that with equity market volatility returning to crisis levels, “uncorrelated – or alternative – income appears an attractive proposition.” New, alternative income funds have increasingly joined an existing universe
of UK equity income and global equity income. Cazenove argues: “in our opinion, fundraising for income – especially alternative income – focused investment companies is likely to continue to dominate new issuance in the near-term.”
The launch data for 2011 certainly bears this out. It was a challenging year for new issues, with only six companies getting off the ground, but the majority of these were in the specialist sectors and most had a strong income theme. Only two launches were in more conventional sectors: Diverse Income Trust in the UK Growth & Income sector and Henderson International Income in the Global Growth & Income sector, raising £50m and £42m respectively. Two launches last year were in the Sector Specialist: Debt sector, with NB Global Floating Rate Income being by far the largest launch in 2011, raising £309m. The other Sector Specialist: Debt fund was Duet Real Estate Finance, raising £50m. Other specialist sector launches in 2011 included Renaissance Russia Infrastructure Equities.
In the current low interest rate, inflationary environment, it’s easy to see why there has been such strong demand for infrastructure funds. The Sector Specialist: infrastructure sector enjoys one of the highest average dividend yields, yielding
an average of 5.3% at the end of October 2011 and on an average premium of 1%
\- it’s clearly resonating with investors.
Indeed Collins Stewart recently commented: “Listed infrastructure companies continue to go from strength-to-strength, with growth underpinned by superior risk-adjusted return characteristics and attractive, sustainable and growing dividends. The power of compounding solid absolute returns has delivered significant outperformance of other asset classes. Given genuinely low correlations with other asset classes and proven capital preservation qualities, they have an important role to play in improving portfolio diversification. Given the marked deterioration in the macro economic backdrop in recent months…the defensive qualities of listed Infrastructure could result in material outperformance over the coming months.”
But it’s not just specialist income sectors that have been exploding onto the scene
in recent times. In 2010, a third of the 15 investment company launches were in specialist sectors. But neither were the other two thirds in what could be described as particularly mainstream sectors either, focusing as they did on country specialist areas such as China, in the form of the high profile Fidelity China Special Situations, and Latin America (Aberdeen Latin American Income), Global Emerging Markets
(BlackRock Frontiers) and Hedge Funds (CQS Diversified and BH Credit Catalysts). Only a couple were in UK focused sectors. Specialist sector launches in 2010 included: John Laing Infrastructure and GCP Infrastructure Investments. Other specialist sector launches in 2010 included NB Distressed Debt, Polar Capital Global Healthcare Growth & Income and Baker Steel Resources.
Of course the rise in sector specialist investment companies can really be put down to the closed ended structure, which lends itself well to investing in specialist, often illiquid assets, because managers can take a long-tern view of the market without the worry of having to sell good stock to meet redemptions.
While institutions have tended to bring much of their investment expertise in house in recent years, they are perhaps more open to the idea of using the investment company structure to access some of the more esoteric sectors. Meanwhile, they are also a good way for private investors to diversify their portfolio.
So where does all this leave the core investment companies in those much loved Global, UK, and other core sectors AIC figures to 31 October 2011 suggest these should still continue to dominate for a good while yet. The Global Growth/ Global Growth & Income sectors have combined assets of £20.5bn – more than double the assets of the specialist sectors combined and accounting for nearly a quarter of the conventional investment company sector as a whole. The UK Growth/ UK Growth & Income sectors have combined assets of £9.6bn, in line with the total assets of all of the 13 specialist sectors combined.
Yet there’s no escaping the fact that assets under management in the specialist sectors have been creeping up at a much faster rate than some of the core sectors over the past five years. Specialist sectors accounted for 7% of the sector’s total assets under management five years ago, growing to 11% by 31 October 2011 (£5.2bn to £9.7bn). Although the total assets in the Global Growth/Global Growth and Income sectors have risen slightly over the past five years, from £19.7bn to £20.5bn, the UK Growth & Income/ UK Growth sectors combined total assets have shrunk slightly, from £11.2bn five years ago to £9.6bn at end October 2011. Sectors to have seen the largest growth over the past five years are Hedge Funds, growing in size from £2.3bn total assets to £6.2bn at end October 2011, Asia Pacific
(Excluding Japan) (growing from total assets of £2.2bn to £3.8bn at end October 2011), and Global Emerging Markets, growing in size from £2.9bn to £4.7bn at 31 October 2011.
Interestingly, while the specialist sectors have dominated recent launch activity, discounts and premiums are still something of a mixed bag, as might be expected in such a diverse range of niche sectors. The Sector Specialist: Commodities and Natural Resources sector traded on an average discount of nearly 16% at 31 October 2011, compared to an overall industry average of 9%. And despite there being real demand for the Sector Specialist: Forestry & Timber sector, demonstrated by recent launch activity, the sector traded on an average discount of 21% at 31 October 2011. However, the Sector Specialist: Infrastructure sector meanwhile traded on a 1% premium at 31 October 2011 illustrating the current strong demand for sectors with an income theme, while the Sector Specialist: Debt sector was trading on just a 2% discount at 31 October 2011.
The investment company sector has in some ways come full circle since the first investment companies were launched in the latter part of the 19th century and beginning of the 20th century. The London investment trusts were in large part formed to invest fortunes from the 19th century railway boom and so could be seen as the infrastructure funds of their day. The Scottish trusts mainly invested money made by the jute barons of Dundee whose fortunes were made as a result of the American Civil War. For The Edinburgh Investment Trust, formed on 1st March 1889, personal recommendations counted for a great deal, which explains the number of breweries, tobacco companies and even diamond mines selected at the time. In this context, the rise of the specialist sectors over the last few years has really been a continuation of what the early investment companies were all about: investing in what would have been very difficult sectors to access, with the recent demand for infrastructure investment companies echoing what many of the earliest launches were all about.
