It’s been a strong year for investment trust initial public offerings (IPOs), with 15 by the end of October amounting to £2.61bn, according to the Association of Investment Companies (AIC). These have been followed by a further two in the first half of November – M&G Credit Income Investment Trust (MGCI) and Gresham House Energy Storage Fund (GRID), which each raised £100m – and more are expected between now and the end of the year. But a key differentiator between what has been coming to market this year and many of the issues of the past decade is that a number of the launches have a growth rather than income focus, and invest in equities rather than high-yielding alternative assets.
The most obvious example is Smithson Investment Trust (SSON), which raised £822.5m, making it the largest ever launch of a UK-domiciled investment trust, beating Woodford Patient Capital Trust’s (WPCT) £800m launch in 2015. Smithson invests in small and medium-sized companies listed globally with a market capitalisation at the time of investment of between £500m and £15bn.
Other equity-focused launches include Mobius Investment Trust (MMIT), which raised £100m, albeit short of its £200m target, and AVI Japan Opportunity Trust (AJOT), which raised £80m to invest in Japanese smaller companies.
However, these aren’t traditional equity funds. Mobius Investment Trust is focusing on companies with the potential for operational, financial, and environmental, social and governance improvements. AVI Japan Opportunity targets what it describes as overcapitalised small-cap Japanese equities, whose managements it will engage with and help to unlock value for shareholders. This will be along the lines of the activist approach that its manager, Asset Value Investors, has been taking with some of the holdings in another fund it runs, British Empire Trust (BTEM).
But perhaps the most striking example of a recently launched investment trust that is more than a regular equity fund is Baillie Gifford US Growth Trust (USA). It invests in US equities, but at the end of September had seven unlisted investments accounting for 5.9 per cent of its assets. This may not sound much, but it is very likely to rise.
Baillie Gifford says: “We have observed that, increasingly, companies in the US are choosing to remain private for longer, and as such the public equity markets do not offer the full spectrum of growth investment opportunity that we have previously enjoyed. The trust’s ability to invest up to 50 per cent of its net asset value (NAV) in unlisted equities at the time of purchase gives us the flexibility to invest in what we believe are the exceptional growth companies in the US, whatever their listed status.”
Looking beyond listed equity markets has so far been beneficial to another trust Baillie Gifford runs – Scottish Mortgage Investment Trust (SMT). It recently reported that between when it started investing in unquoted investments in June 2010 and the end of September 2018, this segment of its portfolio has made an impressive return of 419 per cent, well ahead of FTSE All-World Index's return of 163 per cent over the same period.
A number of other existing trusts ranked in mainstream investment trust sectors have an allocation to unquoted assets, notably Woodford Patient Capital Trust in the UK All Companies sector, F&C Investment Trust (FCIT) in the Global sector and Fidelity China Special Situations (FCSS) in Country Specialists: Asia Pacific. Lindsell Train Investment Trust (LTI) and Chelverton Growth Trust (CGW), meanwhile, hold stakes in the unquoted management companies that run them.
An increase in exposure to unquoted investments, in both new and established investment trusts, is not something to be complacent or even necessarily pleased about, as we pointed out in last month’s IT Geek column. Unquoted investments are very high risk – they can make great returns, but they can also make very great losses, and are a lot less transparent than listed equities.
Scottish Mortgage Investment Trust’s managers responsibly point out that they “are keen to set realistic expectations for Scottish Mortgage's own shareholders. Overall [we] would suggest that, if anything, the results from investing in such companies so far for Scottish Mortgage have been unduly good. Just as with the publicly listed holdings, some will not work and a number may fail outright. Only a handful will really drive the returns.”
What this all underscores is the evolving nature of investment trusts. If a new fund comes to market it has to have a unique selling point, because if you want basic equity exposure these days you can get it very cheaply via an exchange traded fund (ETF) or tracker fund, in some cases for an ongoing charge of less than 10 basis points a year. And if you want actively managed exposure to mainstream equities there are thousands of existing funds and investment trusts offering this, some of which have very strong performance records and competitive charges, meaning they are unlikely to be outdone by any new entrant.
As an investor, it is no bad thing to have increasing options with which to diversify your portfolio, meaning you really can have investments for all seasons. The downside to this is the increasing complication of investment trusts, so that more than ever before you have to do very thorough due diligence before you invest. We have always said at Investors Chronicle that investment trusts are for the discerning investor, and you now have to be very discerning.
Investment trusts have always required more due diligence and background research than open-ended funds. For example, they typically trade at discounts or premiums to NAV, which could have an influence on when you buy and sell their shares. And they can gear – take on debt to invest more in markets than their assets amount to. This can boost their returns in rising markets, but compound their losses in falling markets, so you need to know if a trust has gearing, how much it is and have a high enough risk tolerance to take on this added liability.
Trusts also have generally less prescriptive investment limits and rules than open-ended funds, and their closed-end structure means they can invest in illiquid and higher-risk investments – a reason why they are able to look beyond plain vanilla equities.
The increasing complications and potentially higher risks of investment trusts don’t mean you should avoid them, though, especially as some investment trusts hold lower-risk assets, don’t gear and are conservatively managed. Our professional investor picks, for example, always include a number of suggestions for wealth preservation. But you should still be prepared to go the extra mile and do all the research necessary to understand exactly how a trust works and what it invests in before you commit money to it.
Even more importantly, as with any investment, an investment trust should fit in with your asset allocation – the range of assets you have decided is appropriate for trying to meet your financial goals. So, for example, although investment trusts with substantial allocations to unquoted investments are higher risk, if you have a long-term investment horizon, a high risk appetite and are looking for growth, they could account for a small part of your portfolio.
One of the reasons why we put together an investment trust special each year is to help you narrow down appropriate investment choices for the asset allocation you have decided is appropriate for your needs. These articles include a number of suggestions from professional investors and analysts, because the insights from these sorts of investors can be a useful addition to the fact-find that you undertake yourself. But while these can be part of the information you build up to get an idea of whether an investment trust is right for you, it should never be a substitute for your own thorough research.
For all the features in our Investment Trust special, click below:
Investment trust IPOs over the first 10 months of 2018
|IPO||Amount raised (£m)||AIC sector|
|Marble Point Loan Financing (MPLF)||148||Sector Specialist: Debt|
|Augmentum Fintech (AUGM)||94||Sector Specialist: Tech, Media & Telecomm|
|Baillie Gifford US Growth Trust (USA)||173||North America|
|JPMorgan Multi-Asset Trust (MATE)||93||Flexible Investment|
|Life Settlement Assets (LSAA)||134||Sector Specialist: Insurance & Reinsurance Strategies|
|Gore Street Energy Storage Fund (GSF)||31||Sector Specialist: Infrastructure - Renewable Energy|
|Odyssean Investment Trust (OIT)||87||UK Smaller Companies|
|Ashoka India Equity Investment Trust (AIE)||46||Country Specialists: Asia Pacific|
|Hipgnosis Songs Fund (SONG)||202||Sector Specialist: Tech Media & Telecoms|
|Tritax EuroBox (EBOX)||300||Property Direct - Europe|
|Trian Investors 1 (TI1)||271||Sector Specialist: Financials|
|AVI Japan Opportunity Trust (AJOT)||80||Japanese Smaller Companies|
|Ceiba Investments (CBA)||30||Property Specialist|
|Mobius Investment Trust (MMIT)||100||Global Emerging Markets|
|Smithson Investment Trust (SSON)||823||Global Smaller Companies|