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Magazine Issues » November 2021

Investment trusts roundtable: A new lease of life

Investment trusts have been around for more than 150 years, but some of their attractions became more apparent in the pandemic. Our expert panel discussed the virtues of such products and how they can be communicated to investors.

Inventment_Trusts_Roundtable_Nov_2021

Colm O'Brien (UK head of sales, BNP Paribas Securities Services)
Annabel Brodie-Smith (Communications director, Association of Investment Companies (AIC))
Thomas Moore (Senior investment director, abrdn)

Funds Europe – Given the long history of investment trusts in the UK, what is it about their structure that has helped them remain relevant to the modern investor?

Annabel Brodie-Smith, Association of Investment Companies (AIC) – That’s a very good point, because they do have a very long history. The first investment company was launched in 1868, so they’ve been around for 153 years, and I think the one thing that really makes them still relevant is their ability to adapt to meet investors’ needs. We’ve seen that very clearly recently through the pandemic, when there’s been a dividend drought. Investment companies have the ability to retain income and then pay it out in times of trouble, and we did have obviously some very tough times during that pandemic.

Also, they’re listed companies with a fixed pool of capital, so managers can take a long-term view of their portfolio. They don’t have to face inflows and outflows like open-ended managers, and that has been also really important and relevant during the pandemic period, because it is a massive advantage for them to invest in hard-to-sell assets like property, renewable energy and illiquid forms of debt. Therefore investors have been able to buy and sell them throughout the pandemic.

Funds Europe – Thomas, I could see you nodding along there. Did you want to add anything to what Annabel has already said about the structure?

Thomas Moore, abrdn – Everything Annabel said is right. As a practitioner I have lived and breathed what Annabel said in terms of the ability to ensure that we meet clients’ objectives. My investment trust hit its 20-year anniversary last year in terms of dividend growth, so it became an AIC Dividend Hero, and what’s important for me is keeping in mind what are my objectives here?

We have a 6% dividend yield and I’ve got to go out and shout from the rooftops about why that dividend yield is on the high side and why I believe that I can continue to generate really attractive income. I have gearing, I have the accountability from the board, the directors holding me to account every three months at the very least. And we have reserves, so we have been able to use those reserves during 2020. We’ve dipped into them for the first time in over a decade in this trust. It was the rainy day. It wasn’t even just rainy, you could call it a monsoon last year. So, we dipped into the reserves. Now the reserves are looking very healthy again because our portfolio income is growing.

Colm O’Brien, BNP Paribas Securities Services – There are a combination of things here keeping investment companies relevant. Annabel and Thomas have touched on them, but combining the ability to hold innovative products like private placements or convertibles, use gearing, and remain liquid while investing in illiquid assets really does frame the future very positively for investment trusts.

The liquidity point is critical when you look at what is happening in the alternatives space. Capital is flooding into alternatives as investors look for enhanced long-term returns, and diversification from traditional assets, but in many cases, this can come at a cost: illiquidity, or the inability to be able to access those investments at short notice. The investment trust structure negates that issue as its shares are always tradeable.

One of the criticisms that has been levelled at investment trusts over the years is the premium/discount question, where the market price for shares in a trust may not reflect the net asset value of the underlying portfolio. While that’s true, it’s important to remember that it can work both ways: in the right market conditions, shares trade at a premium to NAV, just as they can also trade at a discount. And particularly when the underlying portfolios hold illiquid assets, the ability to trade at short notice is a highly attractive characteristic of these vehicles.

Brodie-Smith– When you think about our structure, it’s so suitable for the income generating from alternative assets like property, like infrastructure, but I also want to mention it for growth. It’s important to have that ability to invest in less liquid assets for growth. With unquoted companies, for example, we’ve obviously seen a real boom. Companies are staying private for longer. There are opportunities there for investors to invest in the growth before the market listing. Also, there is scope for lots of innovation. If you want to invest in anything from space to tech companies or emerging markets, that structure for long-term capital growth is also very important. That’s another reason why they’ve stayed very relevant.