Investment trusts enjoy record purchases in first half, AIC reports
UK investment trusts enjoyed their strongest ever start to a year, with purchases by advisers and wealth managers increasing 74% compared to the first half of 2016.
In the first six months of 2017, £514m was poured into investment trusts, data from the Association of Investment Companies (AIC) showed on Tuesday, which was a record for the sector and while last year was significantly lower, was still up 26% on purchases in the first half of 2015.
In the second quarter of 2017 alone, purchases of investment companies on adviser platforms hit £264m, which was the second-highest quarterly level of purchases on record, 6% higher than the £249m in the first quarter and only second to the £274m purchased in the second quarter of 2015 when Neil Woodford launched his Patient Capital Trust.
Global-focused trusts were the most popular, with 15% of purchases, while the UK property direct sector got 13% of advisers' choices, followed by UK equity income with 11% and private equity with its highest ever ranking amid a 6% shale.
AIC chief executive Ian Sayers said: "It’s clear that advisers are not only recognising the benefits of investment companies for equities but are increasingly aware of the strength of the closed-ended structure for accessing illiquid assets.
"The Property Direct – UK sector has been popular since the problems of open-ended property funds last year, and it’s interesting to see that the Private Equity sector, one of the few ways investors can access portfolios of unquoted companies, is gaining adviser interest.”
Investment trusts are closed-ended investment funds, meaning they have a fixed number of shares in issue that are traded on the London Stock Exchange and can rise and fall based on investor demand, as with equities, with no impact on the portfolio.
Their closed-ended nature means investment trust managers have a fixed pool of money to invest, unlike unit trusts which create or cancel units depending on whether money is flowing into or out of the fund. Investment trusts can borrow money to make additional investments and, as with other equities, buying shares gives investors similar shareholder rights such as voting at annual meetings or tabling motions.
Analyst Laith Khalaf at Hargreaves Lansdown said: "Investment trusts are a useful tool in the investor’s armoury, though they are more complicated than unit trusts and carry additional risks. Most importantly the effect of gearing, and the fact investment trusts can trade at a discount or a premium, amplifies both the returns and the losses that can be sustained by investors. In other words both the risks and the potential rewards are higher."
He noted that investment trusts can be particularly useful for gaining access to illiquid assets, such as commercial property, which is an asset class where the open-ended funds market experienced significant trading problems in the wake of the EU referendum result.
"An investment trust structure only partly mitigates the issues experienced in this sector however, because whereas the secondary market in investment trust shares provides investors with liquidity that some open ended funds cannot deliver in periods of stress, there is still usually a price for that liquidity in the form of a widening discount."