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Investment trusts face survival challenge

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Research published by online investment platform, interactive investor, has found that in the last 15 years, survival rates of some investment trusts have been as low as 33 per cent.

The research, which used data from the Association of Investment Companies (AIC) found that over half of investment trusts launched in 2004 are not around today and of those launched in 2006, only 29 per cent are still in existence.

 
According to interactive investor, around 40 per cent of investment trusts launched in 2010 still survive and in 2012, just over half of investment trusts launched remain open for business.
 
Looking further back, the research also finds that of the five largest UK domiciled investment trust IPOs on record (which includes Smithson Investment Trust and Woodford Patient Capital Trust), two of these are no longer in existence – Mercury European Privatisation, launched in 1994 at GBP549 million and Kleinwort European Privatisation, also launched in 1994 at GBP500 million.
 
“These numbers do not tell the whole story of IPO success or failure, just part of it, so it is dangerous to try and make too much from these figures alone,” says John Regnier-Wilson (pictured), head of investment trust sales and marketing, Polar Capital.
 
In fact, individual investment companies can come to the end of their life for a variety of reasons, explains Ian Sayers, chief executive, AIC. “Some investment trusts reach the end of their useful lives – they no longer serve a purpose, so the best outcome for shareholders is to sell the assets of the company and return the capital. Or, some might merge with another company which can help to bring down costs for the shareholder.” He also adds that many funds hold regular continuation votes, which give shareholders the opportunity to decide when to call it a day.
 
Regnier-Wilson adds: “It is perhaps not surprising that the lowest survivorship rates are those launched around the time of the global financial crisis; the investment idea might have been a sound one, but investors were too nervous to do anything more than keep their investments in cash.”
 
James Burns, co-head of the Smith & Williamson Managed Portfolio Service also notes that the number of investment trusts launched pre-financial crisis (25 in 2005, 41 in 2006 and 35 in 2007), were mainly emerging market property funds.
 
“These were a mixed bag and a big majority no longer exist. It would also be interesting to see if the research has recognised any name changes or mandate changes. There have been 130 IPOs since the financial crisis, and you can see that failure rate has come down dramatically,” states Burns. 
 
Nevertheless, says Giles Rowe, senior research analyst, Henderson Rowe, “we will probably need to wait a few more years to see what the 2010 to 2018 closure rate turns out to be.”
 
Whether a company should have regular continuation votes, Scott Bradshaw, investment manager, Mattioli Woods, believes that continuation votes should not be the only way a board or trust gauges interest. He suggests that regular communication with investors will help understand their objectives and reasons for investing and should allow the objectives to be aligned.
 
“There are some trusts who are very good at this and being transparent can help both sides. A continuation vote, particularly if paired with the chance to redeem shares at NAV, could be seen as an extreme option with share realisation schemes and buy backs being alternative options to give investors an out,” says Bradshaw.
 
According to Burns, boards have become more of a force for shareholder rights. “There are more examples of boards moving mandates, reducing fees and taking tough decisions, all of which they might not have done previously.
 
“They are more on their toes for when there is manager style drift. And less tolerant of a star manager who they might have historically been less willing to give a grilling to, because of their reputation.”
 
“It is obviously good practice to understand investors’ views,” concurs Rowe, “but the manager or board is normally best placed to judge whether a fund should continue and has the resources to gauge market forces and commercial factors. What happens if investors want to carry on and the board wants to exit?”
 
Investment companies are the oldest form of collective investment, with 24 of them having been around for over 100 years, explains Sayers. “The industry continues to adapt to the changing world with one objective: to help investors meet their financial needs. It’s a strength of the investment company structure that when a wind-up is the best option for shareholders, there’s an independent board there to make it happen.”
 
Regnier-Wilson agrees with Sayers. “There are clear benefits to a closed-ended structure. Fund managers have more tools at their disposal to achieve the objectives of the trust and to help investors reach their desired outcome. For example, gearing – where the manager borrows money to invest – can magnify performance, both positively and negatively. That brings risk as well as potential reward. However, when used prudently, it can undoubtedly help managers achieve the objectives of the trust.
 
“A fixed number of shares should mean that managers can better cope with volatile markets, compared to open-ended funds, as it should reduce the risk of having to sell prime investments against their wishes.”
 
Conversely, one of the things that stands out in the research, for Bradshaw, is the slowdown in the number of trust launches: with the four years between 2004 and 2008 (124) seeing as many as launched in the next seven years 2010 to 2017 (121). 2016 saw only six investment trust IPOs compared to 41 in 2006.
 
“Part of this will be the impact of the global financial crisis, but also there is in an increasing awareness that trusts need to gain scale, which may mean some trusts haven’t come to market which may previously have launched with smaller market caps. Institutional investors are active holders of trusts and a key requirement will be liquidity, particularly if these are included in model portfolios,” explains Bradshaw.
 
Bradshaw also cites more cautious gearing levels as well as the fact that many of the newer trust launches are in the alternatives areas, so invest in less liquid assets rather than traditional asset classes.
 
“We haven’t really seen tougher markets which may test the appetite for these areas in the last few years. These do potentially offer higher yields than are available on bonds given the prevailing low rate environment, but it remains to be seen how attractive these should be when we move back towards a higher rate environment.”
 
Bradshaw believes that in terms of relative performance, the board of a trust should be able to justify the continuing faith in a manager.  “We have seen a few trusts change manager recently on performance grounds, which may also be a factor for increased survivorship, which is a positive.
 
“Ultimately, there will be more pressure on all of us in the wealth management industry to vote on behalf of our clients, to engage with boards and make our feelings known,” adds Burns.
 

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