5 Interesting Investment Trust Trends from 2012

VIDEO: Morningstar's Jackie Beard describes five investment themes from the world of closed-end funds in 2012

Holly Cook 4 January, 2013 | 6:00PM
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Holly Cook: For Morningstar, I'm Holly Cook and I'm joined today by Jackie Beard, Director of Closed-End Fund Research here at Morningstar, and we're going to look back at 2012 for the investment trust industry, identifying five interesting trends.

Jackie, thanks very much for joining me.

Jackie Beard: Hi, Holly.

Cook: So we've got five different things to talk about today. Number one is the narrowing of discounts in 2012. Tell me a bit about that.

Beard: That's right. So if we look back over the last 12 months, we've seen the average discount narrow by around 1.5%. If we put private equity funds into the mix, then it's higher; it's about 2.5%. Very difficult to know conclusively why discounts narrow, but I think there are a number of factors that have contributed to that.

So I think it's been increased interest from investors, we’re certainly seeing more advisers looking at investment trusts generally. There has been some of the large shareholders being quite active with their boards, trying to get them to act on their discounts. And I think generally an awareness that actually there is less tolerance to discounts now; it's often cited as one of the reasons people don’t use investment trusts, and I think as we move into a post-RDR world, it's one of those areas where they can just tighten up a bit. So, really good to see.

Cook: So I think this ties in with your number two, which was we saw opportunities in European equity funds.

Beard: That's right. So last year, obviously, Europe was very out of favour at the beginning of the year with the whole euro: is it, isn't it? If you looked at the European equity funds sector, the average discount narrowed over that 12-month period by more than 3%. So you’ve got managers in there who are very well respected by Morningstar—we rate quite a few of them in the open-end and closed-end sector. So you’ve got people like Vincent Devlin of BlackRock, Sam Morse of Fidelity, well-known names.

And then taking the example of John Bennett of Henderson, his investment trust outperformed his open-end fund. There was a narrowing of the discount by more than 3%. So investors have got an uplift on both: they've got performance uplift and a discount uplift. Now, yes, [the trust] came with a little bit more risk but it did better [than its open-end version]. So it just proves it’s an opportunity, if you can time it right.

Cook: So number three, I think, is looking at a little bit broader at the industry, you saw some development away from mainstream funds?

Beard: That’s right. So when we looked at the fundraisings for last year, there was about £1 billion of new money that came into the sector, but it wasn’t really into the, sort of, the plain vanilla funds, if you like. So there were a couple of C Share issues from people like Aberdeen Asian Income (AAIF) and Diverse Income (DIVI). There was a new fund launch from BlackRock North America (BRNA), but the majority of new assets came into alternative funds. So things like Doric Nimrod (DNA), where you can buy a bit of an Airbus, and some of the sort of multi-strategy alternative funds.

Cook: Okay. So multi-strategy I think also ties in with our number four, because we saw the BACIT, the Battle Against Cancer Investment Trust. Tell us a bit about that.

Beard: That’s right. This is a fund-of-funds. It’s the brainchild of Tom Henderson and it’s investing in long-only and alternative funds. But what really sets it apart from its peers is that there is no management fee, which is unheard of really in the fund world until now. Tom Henderson and his colleagues on the management team are also providing their services for free. He is also covering all the administration costs.

So instead what they are doing is paying 1% of the fund’s NAV each year to charities, of which half of that's going to the Institute of Cancer Research and the other half will go to nominated charities that they will see fit. But it's a really different idea. I think as an investor, it's a real feel-good factor and actually you still get hopefully some profits from your long-term investments at the same time. So, really nice idea, it will be interesting to see how it goes.

Cook: It's great to see fund managers being altruistic and obviously giving that opportunity for investors to also feel good about themselves.

Beard: Yes, absolutely.

Cook: Okay. So give us your final point then: from innovation to consolidation.

Beard: So we saw a little bit of consolidation last year and I think we should see more. I'm hoping that it's a theme that carries on into 2013. We saw a few of the really quite small funds—particularly investing in smaller companies—amalgamate, and I think it makes absolute sense from an economies of scale point of view. We know that private wealth managers have been longstanding fans of investment trusts. They need funds to be of a critical size for them to be able to use them and I think as everybody looks even more at costs post-RDR, you just can't run small funds in a viable way without having exponential costs. So, hopefully, it's a trend that's going to continue.

Cook: It will be interesting to see how all five of these trends play out in 2013. Thanks for joining me Jackie.

Beard: Thanks.

Cook: For Morningstar, I'm Holly Cook. Thanks for watching.

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Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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