Few would deny that 2013 was a good year for the investment company sector and its shareholders. Industry assets reached a record high of £111bn, performance was good, and we saw a strong year for fundraising. This, together with record net flows (as less money actually left the sector), created a ‘perfect storm’ for the industry. The average investment company discount closed 2013 at its lowest since records began in 1970, demonstrating the current strong demand for investment companies. Interest in investment companies has been boosted by a period of good performance, the dividend track record, access to specialist asset classes and the impact of RDR. “There is likely to be increased speculation about the probable direction of discounts and the search for ‘value’ may become a more pronounced theme in 2014.”
In a post-RDR world, charges have been clearly on the investment agenda. Last year, 10 investment companies abolished their performance fee arrangements, which is a clear trend compared to just three in 2011 and another three in 2012. We have also seen investment companies reduce their management fees this year to compete with open-ended funds. I think it’s likely that we will see this continue into 2014. Indeed, James Anderson, manager of the popular Scottish Mortgage Investment Trust has already stated this year that Baillie Gifford would cut its fees if it issued more shares (the ongoing charge is currently 0.51 per cent).
What to expect in 2014
So, what else are we expecting in 2014? It seems highly likely that the huge appetite for income that has played a key role in the narrowing of discounts will continue this year. No one can predict when interest rates will rise and how quickly this will take place, but appetite for both the core income sectors with strong dividend track records, and the more specialist, higher yielding investment companies with difficult to replicate strategies, looks likely to continue.
There is likely to be increased speculation about the probable direction of discounts and the search for ‘value’ may become a more pronounced theme in 2014. Although the average discount is at a record low, discounts vary widely from sector to sector and across individual companies, and a third of the sector still trade on double digit discounts. Let’s not forget, either, that many investment company boards can issue new shares to help keep a floor to the discount/premium.
The link with fundraising
There is a clear relationship between the strength of the equity markets and fundraising. In 2009, the sector raised just £179m through new issues, compared to a pre credit crunch high of over £4bn in 2007. Last year saw new issues at the highest level since 2007, with the sector raising £2.7bn. Significant sectors in 2013 included sector specialist: infrastructure - renewable energy and sector specialist: debt, between them accounting for nine of the fifteen new launches. It’s hard to believe that income won’t continue to prove a popular theme in relation to launches in 2014. According to Numis, last year’s new issues had an average yield of 5.2 per cent.
Finally, the ongoing impact of RDR on investment companies will remain of interest in 2014. So far, there are some positive indications that RDR is benefiting the sector. The AIC trained over 1,400 advisers in 2013 and adviser sales of investment companies in the first nine months of the year increased 66 per cent on the same period last year. Overall, there’s no knowing whether 2014 will prove as auspicious as 2013 but the investment company sector is well prepared to meet the challenges.
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