Assets in alternative investment trusts have grown exponentially over the past decade. From being a collection of predominantly long-only, equity-focused funds, the investment company sector has changed dramatically over the past decade. The emergence of the alternative investment sub-sectors of hedge funds, private equity, infrastructure, property and debt has been a key development.
Alan Brierley, director of investment companies at Canaccord Genuity, says the illiquidity of these underlying asset classes has made the closed-end structure of investment trusts the preferred option.
"Ten years ago, SVG Capital was the only 'alternative' investment company in the top 25 largest investment companies and it represented just 2.4 per cent of the aggregate market cap," he says. "Today, there are nine companies in the top 25 and these represent 27 per cent of the total market cap. Given their role in improving portfolio diversification, we believe this trend is well entrenched." The table below illustrates the impressive growth of the alternative investment sub-sectors over the past 10 years.
Sector breakdown of 25 largest investment companies (%)
|Sector||10 years ago||Current breakdown|
|Listed Hedge Funds||8.2|
|UK Growth & Income||9.8||6.1|
|Listed Private Equity||2.4||3|
|UK Small Cap||2.2|
Source: Canaccord Genuity Limited Research
Investor demand in the listed infrastructure sub-sector was recently highlighted by HICL Infrastructure's successful £250m fund-raising, which was significantly oversubscribed. Meanwhile, UK Commercial Property (winner of Investors Chronicle's Best Property Fund Award) and F&C Commercial Property now represent 5.7 per cent of the total market cap of the top 25. "Since launch, they have given investors a lower risk exposure to UK property and this served these companies relatively well during the financial crisis," says Mr Brierley.
While investors in the listed hedge fund sector have enjoyed mixed fortunes in recent years, there is still strong demand for funds that can deliver uncorrelated returns. Canaccord Genuity believes the ongoing rationalisation of the sector should see a number of underperforming and/or sub-scale companies closed. This will result in a more focused sub-sector of companies, with good marketability that have met their objectives and have the potential to continue doing so.
The growing popularity of alternative investment trusts is reflected in the recent investment view of Simon James, founding partner of investment manager Gore Browne, who lists his favoured investment trusts as: infrastructure (3i Infrastructure, International Public Partnerships); private equity (Hg, Electra) and property (Medicx, Primary Health Properties).