November 2015

ASSOCIATION COLUMN: Why is it a record year for investment companies?

Annabel Brodie SmithInvestment companies have been in vogue this year. In 2015, to mid-October, the net amount of money raised was a record £4.7 billion (€6.4 billion), higher than every previous calendar year. Despite the summer’s market volatility due to concern over China, the average investment company discount (the difference between the share price and the underlying assets expressed as a percentage) was 3.6% at the end of September, not too far from the all-time low of 2.4% at the end of June, indicating there’s still demand for investment company shares. Why is it a record year for net money raised? Well, £6.2 billion entered the sector through new issues and existing companies issuing shares. The biggest and most high-profile launch was Woodford Patient Capital, which raised £800 million, the largest UK-domiciled investment company IPO ever. The company invests in a diversified portfolio of listed and unquoted early-stage growth companies aiming to achieve long-term capital growth. There has also been a lot of demand for the company since its launch, so the board has decided to issue new shares and an additional £35 million of shares have been issued.  Most of the money raised this year has been in alternative asset classes like specialist debt and infrastructure. These types of assets are illiquid, meaning they can’t be sold at short notice, and so are particularly suited to the closed-ended structure of investment companies. The majority generate a significant income in the mid-to-high single digits, which is an important reason contributing to their popularity. They are also highly rated by the market, with the Infrastructure sector trading at a 9% premium to its net asset value and the Property Direct: UK sector trading at a 5% premium. Big new issues this year include UK Mortgages by TwentyFour Asset Management (£250m), private equity investment company Apax Global Alpha (£218m) and Sequoia Economic Infrastructure (£150m).Within the AIC’s Sector Specialist: Debt sector, investment companies investing in peer-to-peer lending have proved popular with a number of launches and share issues.  However, there are also plenty of long-established investment companies investing in equities which have been issuing shares due to steady demand for the company. These include Finsbury Growth & Income and City of London from the UK Equity Income sector. City of London has an impressive 49-year record of consecutively increasing its dividend and is taking advantage of the investment company structure.  This allows investment companies to retain up to 15% of their income they receive each year in their revenue reserves. When times are tough, these companies can use their revenue reserves to continue to boost their dividends. Other investment companies, such as Scottish Mortgage and Witan from the Global sector, have also been steadily raising money and these both also have impressive long-term records of increasing their dividends.  Of course, it’s worth remembering that popular investment sectors can swiftly fall out of favour. As ever, investors need to take a long-term view and have a balanced, diversified portfolio, to prepare for times ahead. Record net fund raising level, and discounts remaining relatively narrow, indicates that demand for the investment company sector remains strong, with the sector continuing to appeal to investors with new investment opportunities.  Ultimately we’ll have to wait and see what future markets have in store, but there are plenty of reasons to remain optimistic about the sector. Annabel Brodie-Smith is communications director at the Association of Investment Companies ©2015 funds europe

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