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Moving on up

Date: 06 September 2022

We have just undergone the most recent rebalance of the FTSE indices, and it makes for some interesting reading. For the first time we will have four investment trusts listed in the top 100 companies. F&C Investment trust joins Scottish Mortgage Investment Trust, the global growth vehicle run by Baillie Gifford, Pershing Square Holdings, run by US-based hedge fund manager Bill Ackman, and private equity vehicle 3i.

From a performance perspective, it is not necessarily impactful to join the FTSE 100 as most of the benefit from forced buying by trackers tends to come when a stock enters the FTSE All-Share index as a whole. Clearly the greater prominence can help though, and for what it’s worth, performance for the current three trusts was ahead of the market in the twelve months after their entry. If you are looking for some good omens for the broader market, the three previous occasions F&C has entered the FTSE 100 it has been preceded by a market decline and followed by a swift move up in the UK market, in 1995, 2003 and 2009. We can but hope!

Whilst there may not be a huge impact on performance due to these changes, I do think it says something about the state of the UK market – both the increasing importance of the investment trust sector as well as the steady reduction in the number of large UK companies in our home index. What I found even more interesting was when I looked a little further down the list to the next twenty or so companies vying to make that top 100 spot. Whilst having four investment trusts in the FTSE 100 is a first, it may not be long before they are joined by one or two others. Among the next twenty or so largest companies, six are investment trusts, including a number of infrastructure and renewable trusts such as International Public Partnerships, Greencoat UK Wind, The Renewables Infrastructure Group and HICL Infrastructure.

These four trusts have not only outperformed the FTSE 100 over three years but have also received a bounce in their size from ongoing capital raises

These four trusts have not only outperformed the FTSE 100 over three years but have also received a bounce in their size from ongoing capital raises - a strong trend within the 'real assets' sector. According to Numis, these four investment trusts have raised an impressive £2.9bn in the last three years. Demand from investors remains strong, and I think that alone may see the trusts move up to the FTSE 100, in due course. It will also depend on the direction of markets – ongoing weakness plays to the strengths of these sorts of assets, which often hold up well. A move up in the market would likely have the opposite effect, notwithstanding the benefit of further fundraising.

These changes also potentially have a knock-on impact for UK equity fund investors. Presently, the investment trust segment accounts for around 7% of the All-Share and this has begun to have an impact on relative performance at times. It's fairly unlikely that we would ever see a UK equity fund buying Scottish Mortgage, but might the infrastructure and renewables have a place in a UK equity income fund? So far investors have been somewhat limited to a group of global infrastructure equity and diversified real return funds within the funds space. There has been broader interest from UK equity funds in some of the more niche areas though, such as Hipgnosis Songs, the music royalties trust. However, one UK equity manager I spoke to highlighted the potential impact of holding investment trusts given new MIFID cost disclosures. This is probably a whole other podcast topic, but a potential issue worth mentioning now and could see clients facing a nominally higher cost attached to a fund from holding them. As an aside, the manager also noted that they are seeing more companies launch as investment trusts where they might otherwise have launched as a Public Limited Company (PLC), which is interesting. There are plenty of reasons this might be, and perhaps transparency is one of those, for those of you of a more sceptical nature. But either way, the overall trend is clear.

The investment trust segment accounts for around 7% of the All-Share and this has begun to have an impact on relative performance at times

What are the key takeaways from all this? At the headline level, there is probably little real impact from another investment trust making it into the FTSE 100, bar some extra kudos for the team. The longer-term trends are interesting, however. Despite the fact we have not had any new trust IPOs this year, that sector continues to grow in importance for the UK market. It should be seen as a real success story within the context of the UK market for active investments, especially given the ongoing backdrop of outflows. No wonder asset managers have a keen interest as and when boards consider changes in the underlying manager. For UK equity fund investors, I will be interested to see whether we begin to see some buying in the space. Looking across at the US, plenty of funds own Berkshire Hathaway for example, and many of those purely and simply for the attractions of Warren Buffet. I think we may see more funds beginning to think about the real asset space going forwards though. As ever, only time will tell.

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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