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All change please

Date: 16 June 2022

Today I want to take a look at the investment trust sector and share some thoughts on long-term trends going forwards. The last 18 months have been an interesting time. In 2021 we had record levels of IPO activity, with 16 new IPOs launching representing over £7bn in assets.

This was followed by an understandable barren patch so far this year, with as yet no launches. What has also been noticeable has been the trend of ongoing manager change and uptick in consolidation, with five mergers, one takeover and one failed acquisition, alongside six changes in management house. I think we are only going to see more of that happening going forwards.

On the M&A side, we have seen a number of mergers and I expect this to continue to be an ongoing trend. These include BH Macro and Global combining to breathe new life into the hedge fund vehicle run by Brevan Howard and Scottish Investment trust combining this year with JP Morgan Global Growth and Income. The desire to grow investment trusts to a more palatable size to pique the interest of large wealth managers has been one driving factor behind this I suspect, along with certain boards choosing to pursue this route for trusts that have struggled. Certainly, the growth in AUM is to be commended. There are of course circumstances where asset growth should be limited based on the particular investment universe, but if that isn’t an immediate issue then growth often results in cost benefits for the investor and improves the ability to tap into a broader investor base including large wealth managers and institutional investors.

There are of course circumstances where asset growth should be limited based on the particular investment universe, but if that isn’t an immediate issue then growth often results in cost benefits for the investor and improves the ability to tap into a broader investor base including large wealth managers and institutional investors.

We have also seen quite a lot of underlying management change.

We have also seen quite a lot of underlying management change, a combination of manager retirement such as the very recent Rights & Issues Trust, weak performance resulting in the board taking action, as well as changes in strategy. Inevitably every year has its share of management change, but it is noticeable that there have been plenty of fund houses willing and eager to put their hat in the ring to take over these trusts, even when they are smaller in size. The attraction of closed-end permanent capital is especially strong these days, when active management is largely in outflow, and those that do a good job may get the chance to issue shares and grow the trust. That is all a lot easier to achieve than launching a new trust via IPO, which entails a huge amount of marketing and no guarantee it will get off the ground, as we’ve seen this year.

It has been a tough time to take over a trust given recent market conditions, especially for those more growth biased managers, but manager changes within investment trusts should be measured across years, and hopefully decades, if the board get it right.

A different type of change in the investment trust world, focusing towards a greater degree of ESG consideration, has been less prominent.

A different type of change in the investment trust world, focusing towards a greater degree of ESG consideration, has been less prominent. Whilst we have seen numerous open-ended funds shift their mandates to be specifically focused on ESG, only four trusts that I’m aware of have made a significant shift. There have of course been many IPO launches in recent years in areas such as renewables but shifts in mandates have been less prevalent, which may come as a surprise and perhaps sets the trust space out as being a little behind the open-ended world. That’s not to say that investment teams aren’t now more focused on the topic. Most have at least moved on significantly in the last five years, but shifts towards more sustainable mandates are less prevalent, which is interesting.

Looking to the future, I suspect we will continue to see more trust mergers than we have seen in the past as boards look to secure the future for some of the vehicles that are subscale. From the conversations I’ve been having there is also certainly a real appetite from asset managers, both experienced at running investment trust and newer to the market, to participate further in the space. And keep an eye out for further developments with regards to ESG. Perhaps the current market isn’t wholly conducive to change of any type of short-term, but further down the line, I suspect we will see the investment trust space begin to evolve in the way that the open-ended world has in that regard.

This is a marketing communication and is not independent investment research. Financial Instruments referred to are not subject to a prohibition on dealing ahead of the dissemination of this marketing communication. Any reference to any securities or instruments is not a personal recommendation and it should not be regarded as a solicitation or an offer to buy or sell any securities or instruments mentioned in it.

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