Investment trust launches can sometimes attract the most attention when they fall flat. Many investors have noted this year's fundraising bonanza in sectors such as renewable energy infrastructure, but there has also been plenty of talk about the trusts that never got off the ground. Think about the postponed plans for a BMO responsible housing real estate investment trust, Liontrust ESG Trust or the two UK equity trusts that didn’t make it late last year.
We also pay plenty of attention to those trusts that raise less money than they hoped at initial public offering (IPO) or barely manage to gather the minimum amount. But while these struggles can tell us plenty about market sentiment, it's also worth observing the teething problems some newer trusts experience.
When picking recently launched trusts, it can make sense to favour names that have successfully deployed their IPO proceeds, proved their investment strategy is working so far and therefore seem like less of a gamble than they did at launch. But things don't always work out so nicely: sometimes funds take longer than expected to put their money to work or run into other problems. This can trigger share price weakness, throwing up some interesting opportunities.
These names are perhaps as hard to spot as 'mature' trusts, but some might appear in popular sectors. To give one example, Hawksmoor senior fund manager Daniel Lockyer notes that JPMorgan Global Core Real Assets (JARA) has had a difficult start to life since its IPO in late 2019. As with many other trusts, its shares took a big hit in the early 2020 sell-off and recovered somewhat later on. But they have had a rocky 12 months to November 2021.
Lockyer notes that its managers “took a long time to invest”, with the portfolio not notably standing out from other real assets vehicles. But now, trading more cheaply than some other real assets names with early troubles hopefully behind it, the trust could look interesting. JPMorgan Global Core Real Assets recently traded on a very slight discount to portfolio net asset value (NAV).
Other trusts have run into trouble before. Lockyer states that PRS REIT (PRSR), which launched in 2017, had too much cash so struggled to meet its dividend target. It took a couple of years for these problems to “wash through” and for the trust to grow attractive again. Its shares have had some difficult moments, but delivered a total return of around 30 per cent in the first 10 months of 2021.
In the context of a bumper year for fundraising and the hottest investment trust sectors commanding big share price premiums, looking out for stragglers might be a useful way to get in at cheaper valuations. With many trusts launching or doing further fundraisings, Lockyer suspects that some problems might weigh on share prices in a year or so. As he puts it: "Many are probably still in their grace period but investors may get disappointed after a while."
It could therefore be worth watching some of the more popular sectors in case any setbacks present cheaper entry points. As with any bargain hunt, it's worth understanding exactly why something is 'cheap'. If a trust has deployed its money slowly but now looks back on track, that might be an interesting buy.
