Taking a closer look at investment companies in 2015
The AIC’s Annabel Brodie-Smith looks at the investment company sector performance in 2014 and provides some pointers on why advisers might like to take a closer look at the sector in 2015
With 2014 now behind us, it’s fair to say that last year was a kind one for the investment company sector. The average investment company was up 8% over the 11 months to 30 November. There was some runaway performance from the Biotechnology and Healthcare sector, which soared 40%, followed by Country Specialists: Asia Pacific, up 35%, and Property Direct – UK, up 16%.
When it came to individual company performance, the jewels in the crown all came from India. The top performing member company over the year to date (end November) was India Capital Growth, up a staggering 72%, followed by New India, up 59%, and JPMorgan Indian, up 57%. VCTs have also performed impressively over the period. In fact, if you look at the whole investment company sector including VCTs, seven out of the top 10 investment companies were VCTs over the period.
Santa, where were you?
Of course it hasn’t always been plain sailing: December’s volatility put paid to the ‘Santa rally’ which markets have often come to expect. And if you are a commodities investor, you might have a different take on the year too: the average investment company in the Commodities & Natural Resources sector is down 14% over the period. Interestingly, our latest poll of investment company fund managers suggests managers are more optimistic for 2015 for commodities & natural resources: perhaps they think the oil price has bottomed. Time will tell.
So what main themes have we seen in the sector in 2014? Certainly a few records were broken last year: the average investment company discount reached a record low not once, but twice: in February, when it hit 3.3%, and in October and November, when it hit 3.2%. Assets, meanwhile, have hit an all-time high at the end of November of £122m, and it seems hard to believe that is was only two years ago that the sector broke the £100bn barrier for the first time.
Why look at the sector in 2015?
While we’re looking at themes, here’s why advisers might like to take a closer look at the investment companies sector in 2015.
Long-term performance: Investment companies continue to outperform other forms of collective investment over the long-term. Features such as gearing might mean you get a bumpier ride along the way, but they help companies outperform over the longer term. Given that markets have been strong over the last five years, it is perhaps not surprising that Canaccord Genuity’s research that we publish quarterly shows investment companies consistently outperforming over the long term.
Income advantage: Investment companies have some key structural advantages that put them far and away ahead of open-ended funds when it comes to delivering income. They can hold back some of the income they receive each year and squirrel this away for leaner times, allowing companies to ‘smooth dividends’. This has enabled some investment companies to increase their dividend each year for decades. The closed ended structure also lends itself well to higher yielding, alternative assets because managers do not have to sell illiquid assets to meet redemptions, and this is why these sectors have been such a growth area for the industry in recent years as investors seek out income opportunities. Higher yielding sectors such as Infrastructure, debt and property have been very much in demand, along with income focussed companies more generally, and this has contributed in no small part to the historically tight discounts we are seeing. And given markets have gone up so strongly over the last 5 years, that closed ended structure will be useful more generally when and if those tougher times come.
Run for shareholders: It sounds corny, but it’s true: investment companies are owned by shareholders, with an independent board of directors to oversee shareholder interests. And if you want proof of the kind of value they can add, then look no further than the fee and management group changes we saw in 2014.
Fees coming down: A clear developing trend over the last two years has been the number of investment companies abolishing their performance fees: 12 companies announced they were abandoning their performance fees in 2014; 12 also abolished their performance fees in 2013. With charges coming down in the open-ended space in the post RDR landscape, it is not hard to see why.
We have also seen some Boards renegotiate lower fees following changes of fund managers. Last year saw six investment companies change their fund management group, with two further companies announcing plans to change their manager, with shareholder approval being sought at EGMs. One high profile announcement also suggested a change of strategy to a multi-asset focus to take advantage of the forthcoming pension changes.
Liquidity and share issuance: Advisers often comment on liquidity in the investment company sector, and whilst it can be an issue for huge investors dealing in very large volumes, for the average adviser or investor the issue is significantly less so. And if ever an example were needed, look no further than the issuance activity we have seen in the sector last year.
The single largest share issue by an existing company was Kennedy Wilson Europe Real Estate, which raised £351m in October, followed by Tritax Big Box REIT (Property Direct – UK), raising £150m in July (and a total of £171m over the year). Greencoat UK Wind (Sector Specialist: Infrastructure – Renewable Energy) raised £125m in October andBluefield Solar Income Fund raised £123m in November. And that’s just the tip of the iceberg.
It is not just the specialist investment companies issuing shares to meet demand, either. Equity only investment companies have also been active – particularly those with an income focus. For example in the UK Equity Income sector, City of London raised £94m, Finsbury Growth & Income raised £72m, and Merchants raised £23m. Henderson Diversified Income (Global High Income) raised £46m, JPMorgan Emerging Markets Income (Global Emerging Markets) raised £39m, Diverse Income Trust (UK Equity Income) raised £50m through a C share issue, New City High Yield (UK Equity & Bond Income) raised £33m and Murray International (Global Equity Income) raised £24m.
What’s on the agenda for 2015?
So what of 2015? Given the demand for income and the increasing likelihood of interest rates staying relatively low for some time, it is likely that income will remain on the investment agenda next year. This will continue to influence new issues next year, and also issue activity more generally.
We have already seen one investment company make plans to capitalise on the forthcoming pensions changes with a proposed change of strategy, and I wouldn’t be at all surprised if we saw other companies follow suit: watch this space. Certainly the sector, with its significant income advantages, is well placed to capitalise from a new pensions regime.
Fees will also remain on board agendas, as investment companies seek to remain competitive in a post RDR world in the retail focused sectors.
RDR will continue to be an important influence not only on adviser and wealth manager purchases but also on direct purchases, which have grown considerably over the last five years.
There’s no telling where markets might go and, of course, sentiment will be a key driver of trends next year (although our fund manager poll, published in December, showed 91% of managers expecting markets in general to rise next year.)
But whatever happens, the investment company sector is well positioned for the long-term, whatever 2015 throws at it.