Investment trust launches are coming thick and fast, with a distinct focus on alternative assets. From Cordiant Digital Infrastructure (CORD) to HydrogenOne Capital Growth (HGEN), initial public offerings (IPOs) have often focused on areas the average equity fund struggles to reach.
Many alternative asset classes come with the promise of a juicy yield. But backing such names at IPO can involve important trade-offs.
Investors often have to wait until the new trust can fully deploy its IPO proceeds and start to generate its full target yield. Buying in at IPO can also feel like a gamble, with the asset class or investment approach appearing unproven.
Investors may therefore wish to bide their time and invest when a full yield is available and the portfolio seems to be working well. Telling whether a recently launched IPO has matured is no easy task, but some names do stand out.
Some options
Specialists have identified a handful of trusts that they now view as relatively mature. Some have launched more recently than investors might assume.
Daniel Lockyer, senior fund manager at Hawksmoor Investment Management, highlights Digital 9 Infrastructure (DGI9), which only came to market at the end of March this year. Its investment team has rapidly deployed funds, raising gross proceeds of £300m and embarked on further fundraising since. Digital 9 Infrastructure targets a net total accounting return of 10 per cent a year, including an initial annualised 6p per share dividend for its first financial year, ending on 31 December 2021.
Other trusts singled out as “mature” entrants to the market vary in their area of focus. Lockyer points to Hipgnosis Songs Fund (SONG), which launched in 2018 and has not only invested its IPO proceeds but gone on to several rounds of secondary fundraising. Music royalties are a new asset class for private investors, but generate income and may have low economic sensitivity. While some have worried about the standard of disclosure by such funds, Lockyer believes this has begun to improve.
As with any new asset class, there is still reason for caution. For one, we are yet to see how exactly Hipgnosis would fare in an economic downturn or an equity market crash.
Mick Gilligan, head of managed portfolio services at Killik & Co, points to a trust from the renewable energy infrastructure space. Gresham House Energy Storage (GRID) acquires and constructs battery energy storage systems and launched in November 2018. “The trust now has a 30 per cent share of the UK battery energy storage systems market so has achieved scale quite quickly,” he says.
Paying the price
A big risk of the wait-and-see approach relates to price: investment trusts with interesting themes can command big share price premiums, and these can sometimes develop quickly. To give recent examples, Seraphim Space Investment Trust (SSIT) and HydrogenOne Capital Growth both traded on substantial premiums at the end of October, having only launched this summer.
As our chart shows, 15 of the trusts launched in 2018, 2019 or 2020 traded on single-digit premiums to NAV on 28 October, compared with seven on double-digit premiums and 12 on a discount. When it comes to double-digit premiums – or discounts – it makes sense to ask exactly what is driving the price.
Beyond alternatives, some equity trusts from recent years might also appeal. Gilligan points to ScotGems (SGEM), the emerging market smaller companies trust launched in 2017. He views this as a portfolio of well-managed and financed smaller companies in high-growth regions. That said, he sees it as one to “buy a position in and hold tight rather than one for the savings plan” given its volatile investment universe. The shares have traded on a chunky discount, something Gilligan attributes to high fees and a wide bid/offer spread.
Gilligan also highlights Nippon Active Value Fund (NAVF), which floated early in 2020. It focuses on building big stakes in undervalued Japanese companies and engaging with managements to bring about change. Gilligan believes the strategy has worked well, with the shares up by around a third since launch and the trust looking to raise additional funds over the next 12 months via a C share issue.
