While 2012 saw just eight new fund launches on the London Stock Exchange, listed investment companies outperformed the FTSE All Share index and more than £3 billion (€3.5 billion) of new capital was raised.
This was accomplished despite the regulatory uncertainty affecting the asset management industry generally.
The key theme was the demand for income. Of the eight funds that successfully launched on the London market, six specifically targeted dividend yields in their prospectuses, including the largest initial public offering of the year, that of Starwood European Real Estate Finance Limited. The focus on a steady stream of cash was also apparent in secondary fund raisings, where four large infrastructure funds raised £800 million in aggregate, accounting for almost a quarter of all cash raised by investment companies in the year.
Investment companies have taken advantage of their closed ended structure by concentrating on alternative assets. Without the constraints of having to manage liquidity in order to meet possible fund redemptions, closed ended funds are able to invest in illiquid assets and hold investments for the long term. The success of listed infrastructure funds is an example of this and a clear majority of the new funds launched in the year invest in illiquid assets.
These twin trends are likely to continue in 2013.
The biggest new launch to date is that of Greencoat UK Wind, which will invest in UK wind farms and targets a 6% dividend.
Despite their advantages, the repeated complaint about closed ended structures is that the shares can trade at a discount to net asset value. While the Retail Distribution Review affords investment companies
an opportunity to compete on equal terms with their open-ended peers, wide or variable discounts are likely to put off financial advisers if they can buy a similar product in an open ended variant. Among some firms there is a real desire to take control of the discount issue, with both Invesco Perpetual Select Trust and BlackRock Income and Growth Investment Trust making recent statements that they intend to follow a zero discount policy. Their success will be closely watched.
Perhaps the key challenges to be faced in 2013 will be regulatory. The Alternative Investment Fund Managers Directive (AIFMD) will be at the forefront of most peoples’ minds. The implementation date is July 22 and, despite pleas by the industry, this will not be extended. Thankfully, the Financial Services Authority (FSA) is taking a sensible approach and utilising the full 12-month transitional period for existing funds. If anyone launches a new investment company in the EU after July 22, however, full compliance with the directive will be mandatory from the start. This may result in a blackout period for new launches in the UK, however, as the FSA has indicated that it will not begin accepting applications for authorisation as an AIFM until July 22. How quickly those applications can be processed is a matter of conjecture, despite the three-month limit stated in the regulations.
Another area to watch is shadow banking. The Financial Stability Board is taking the lead, athough the European Commission, the Bank of England and the FSA are examining the issues. Given the increasing number of income-hungry funds investing in debt instruments or originating loans themselves, any over regulation in this area could impact on their returns.
The investment company industry is proving to be resilient and adaptable. This month the Association of Investment Companies reported that for the first time total investment company assets under management was more than £100 billion. Let’s hope over-regulation does not stifle future growth.
Richard Sheen is a partner and Tim Page is a senior associate at Norton Rose
©2013 funds europe