It has been an interesting year in the investment trust space so far, with a recent spate of initial public offering (IPOs) activity drawing attention from media and investors alike. IPO activity is useful to monitor, as it can give clues to where we are in the market cycle. It gives the clearest indications of what asset managers think will sell, whether investors want to buy, and a hint at the short-term outlook for an asset class.
There are a raft of funds about to come to market. These include: the Mobius Investment Trust (MMIT), a small and medium-cap emerging market equity fund; the AVI Japan Opportunities Trust (AJOT), a Japanese value equity strategy; Merian Chrysalis Investment Company, a UK private equity fund from Old Mutual Global Investors; and the Smithson Investment Trust, a global smaller companies fund.
While the overall number of IPOs in 2018 has not been anything unusual, it is the composition of IPOs from different asset classes that is remarkably different to previous years. Preceding the four offerings, earlier this year mainstream companies such as Baillie Gifford and JPMorgan Asset Management also launched the Baillie Gifford US Growth Trust (USA) and the JPMorgan Multi-Asset Trust (MATE), respectively.
These trusts are all different – but the one thing they have in common is that they are all traditional asset classes, and with the exception of JPMorgan, equity investment trusts. This, along with share issuance from existing investment trusts, has given the market a different shape in 2018 compared with 2017.
Analysis from brokerage Winterflood shows 41 per cent of all issuance in 2018 until September had been for equity and private equity investment trusts. In 2017 this accounted for 15.8 per cent. And these figures do not include the four companies floating in the coming weeks, which between them are targeting around £750m in capital.
There are two ways to look at this. One is that equity investing is now very much in vogue and so investment companies have been launching or expanding. The second is that the asset classes that were popular in 2017 are not in 2018. Last year’s issuance was driven by property and infrastructure trusts, which between them accounted for more than 50 per cent of the market. This year, the duo account for 38 per cent.
It is difficult to say which way around it falls, perhaps both, but it is also fair to say that the need for alternatives such as property and infrastructure has not necessarily died down.
According to Simon Elliott, a research analyst at Winterflood, this IPO activity is not likely to stop there. “It certainly appears to be a busy time,” he says. “We suspect that there will be even more potential IPOs announced in the forthcoming weeks, in addition to which it is also highly likely existing funds trading on premiums and performing well will be tempted to raise additional capital.”
And so it is set to continue. This is what makes this unlikely to be a coincidence and gives an interesting insight into where those who run investment funds and those who invest think we are in the market cycle.
There is another factor to consider as well, and that is Brexit. The recent spike in the number of IPOs could be linked to fund companies wanting to have products ready before next year’s Article 50 deadline, the assumption being that market conditions could just be that much tougher.
However, Sarah Godfrey, director of investment companies at Edison, a consultancy, says she thinks it could be a classic sign of the global equity market being late cycle and investment managers trying to catch up. Quick-fire fund launches, followed by investors allocating capital, only for the best of the returns to be sitting behind us.
We can see this in the way markets have moved. The Mobius Investment Trust will invest in emerging markets, but launches after three-year returns for the MSCI Emerging Markets and MSCI Emerging Markets Mid Cap indices have risen 63 and 49 per cent respectively.
Smithson follows the MSCI World Small Cap index, up 73 per cent in three years, and AVI Japan Opportunities follows the MSCI Japan Value index, which rose 50 per cent. With perhaps the exception of the latter, it would take a brave prediction to suggest similar returns will be seen in the following three years.
Nonetheless, it’s a busy period for investors analysing all the new products coming to market. All the trusts mentioned have their merits as long-term holdings and are run by managers with outstanding track records, so they should not necessarily be ruled out because they’re three years too late. However, the timing does seem a shame, especially given how few came to market in 2017.
