November 2014

ASSOCIATION COLUMN: Hold up in a storm

Annabel Brodie SmithAfter a strong quarter one and quarter two, it seems that lingering worries such as Ebola, lower global growth forecasts issued by the International Monetary Fund and geo-political threats may finally be starting to creep into markets.  The third quarter of this year saw the FTSE All Share fall 1%, although the investment company sector in the UK proved more resilient, with performance up 1.84%. This was the second quarter this year that the investment company sector has outperformed the FTSE All Share, perhaps because of the sector’s higher overseas exposure, as analysts at Winterflood Securities point out. It is also interesting to see that, while the FTSE All Share declined in the third quarter, investment company discounts, which tend to move in line with wider markets, actually narrowed slightly. They remain at historically tight levels – at 5.5% at the end of September, according to Winterflood Securities, compared to 5.9% in June.  Sentiment towards the investment company sector remains strong, and while the average investment company discount has widened out somewhat since the start of the year, discounts are still, on average, at historic lows. Much of this strong demand has been directed at income-focussed sectors, from the more traditional UK equity income sectors, through to the more specialist, income focussed sectors.  This has been reflected in initial public offering (IPO) activity, which has focussed on specialist sectors such as peer-to-peer lending, distressed debt and property, through to renewable energy infrastructure. These are specialist, illiquid sectors which the closed-ended structure lends itself to because there is no need to sell assets to meet redemptions. But the key, unifying theme has been income: the new launches we have seen have mostly been in higher yielding sectors, with five of this year’s IPOs offering target yields of 6% or above, according to Winterflood Investment Trusts.  Renewable energy has been a strong theme as far as new issue activity is concerned. It is telling that of the three companies in this sector launched within the last 12 months, all are trading on a premium, perhaps reflecting the continuing demand for income as the average yield in this sector is 4.9%. Certainly, industry assets remain close to an all-time high, with assets for the investment company sector at £117 billion (€148.3 billion). It is hard to believe that it was only in January last year that the investment company industry’s assets broke the £100 billion barrier for the first time. Investing is for the long-term. Alan Brierley, an investment company analyst at Canaccord Genuity, recently summed things up well when he said that there was often too much emphasis on discounts: “The message when choosing an investment should not be whether it is trading on a 5% discount or a 7% discount, discounts should not be a key driver: [investors] should identify quality and put it in the bottom drawer. Buy it and hold it for the long term.” Annabel Brodie-Smith is the communications director at the Association of Investment Companies ©2014 funds europe

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