Hands off our investment trusts – closed-ended funds are deliberately different from open-ended funds and are designed for LONG TERM investors, not short-term trading
- Hands off our brilliant investment trusts! Saba’s attacks are an existential threat to the sector and Boards must recognise the dangers before it’s too late.
- Turning closed-ended funds into open-ended funds destroys their long-term value and will harm UK markets and growth.
- Investment trusts comprise about a third of the FTSE 250 are a long-standing UK success story for London and Ediburgh.
- Closed-ended structures offer specialist portfolios of less liquid or real assets, such as infrastructure, alternative energy, small growth companies or housing whose value is achieved over the long-run.
- Unlike open-ended funds, investors can exit in large numbers without risks of gating, or forcing managers to sell good assets to meet liquidations which damages value for other investors.
- Have we learned nothing from Woodford?
- FCA has harmed this sector as regulatory confusion over charges disclosures in recent years suggests lack of understanding that ignored the important differences between open and closed-ended funds.
Saba ignores the fact that Investment Trusts have generally delivered strong long-term returns and dividends for their investors: It is understandable that short-term traders or hedge funds do not appreciate the value of closed-ended investment trusts – which are designed to deliver good long-term returns through market cycles, from carefully selected assets. Until recent years, discounts and premia were a normal part of the landscape. But recently, as rising interest rates made the macro environment less favourable, regulatory imposition of misleading charge disclosures to investors, created massive selling pressure and significant discounts, which Saba has sought to capitalise on, regardless of these investment trusts’ strong long-term returns for their loyal investors. These are deliberately NOT open-ended funds!
Investment Trust Boards need to wake up to the existential threat being posed to closed-ended structures and help investors understand their value: Baroness Sharon Bowles, a group of industry experts, lawyers and myself have been highlighting the threats to this sector in recent years. Sadly, many investment trust Boards have been slow to realise the seriousness of the threats they face. Having been through cyclical downturns and periods of discount before, they know that long-term value usually continues to grow over time for loyal long-term investors. However, the recent turmoil and extensive discounts have created new existential threats, which could be terminal if nobody speaks up for the value of closed-ended funds, relative to open-ended structures.
Investment trusts build portfolios of assets selected to perform well over time – many are in real assets or specialist sectors that ordinary investors cannot access on their own: Investment trusts enable retail investors to benefit from buying shares in a diversified range of companies or specialist sectors, which they could not access in such a diversified manner on their own. Originally, over a century ago, investment trusts just held quoted companies, but the sector has reinvented itself to invest in real assets and less liquid holdings, such as small growth businesses, infrastructure, property and sustainable alternative energy projects. Therefore, investment trusts offer retail investors or small institutional funds, expertly managed diversified portfolios that can grow and generate returns over the long-term.
Have we learned nothing from Woodford? Open-ended funds are not best suited to holding less liquid assets, if large selling requires liquidating good investments to meet redemptions: Investing in long-term holdings, which often have j-curve return profiles and deliver best value over many years, is not suited to open-ended funds. If large investors suddenly need to redeem their investment, open-ended funds may be forced to sell the best holdings, thus damaging future returns for other investors. Or, as happens with property funds or small company unit trusts, the fund can deny redemptions by gating and locking up investors’ money. By contrast, investment trusts do not need to disturb their underlying portfolios when any of their investors sell. The market mechanism takes care of this, thus protecting retail investors from long-term losses.
Investment trusts are not high-cost consumer products and should not be directly compared with open-ended funds. In the past few years there have been large sellers of investment trusts, especially driven by the flawed cost disclosure rules which forced closed-ended companies to pretend they charge their investors ongoing direct fees, when they actually do not! However, during the selling, as discounts opened up, the portfolio assets can remain in place and, indeed have given investors the chance to buy the assets at a discount when the market share price is depressed relative to the actual value of the shares (Net Asset Value). Of course, that is partly what Saba has picked up on, to snap up the assets while others were selling, on a flawed premise. But Net Asset Values for these funds have not been properly reflected in the short-term share prices since 2022. Forcing the portfolios to be liquidated will potentially depress the Net Asset Value, if long-term holdings have to be sold before they deliver their real value. This damages the interests of other investors.
Investment trusts are more like lower-risk equities, rather than open-ended funds, and they offer unique access for long-term retail or pension investors into diversified portfolios of real assets: Many pension or retail investors want to invest to support economic growth, often looking to participate in alternative energy or housing projects and infrastructure, or support new growth businesses. Up to 2022, investment trusts were providing this type of funding and built up portfolios of assets such as wind farms, solar farms, social housing and other less liquid long-term holdings. This brought much-needed new investment to the sector, as investors were attracted to new fund-raisings and ploughed money into investment trusts. Since the large-scale selling, these investment trusts have been unable to raise more money and have even had to spend their resources to buy back their own shares, rather than expanding to buy more assets that could boost growth. It is estimated that around £50billion of productive investment has been lost in potential new funds for growth projects.
It is in all our interests that the benefits of closed-ended fund structures are recognised, valued and maintained for the future. This is worth fighting for!
One thought on “Hands off our investment trusts – closed-ended funds are deliberately different from open-ended funds and are designed for LONG TERM investors, not short-term trading”
Your comment is excellent, but all trust Board’s need to be seen to be pro – active as the future of this hugely attractive investment medium is at stake.
The very reason why Trusts compete so strongly with Open Ended funds is the fact that they are closed ended with the consequence that issuance and buybacks are at the discretion of the Board’s, not investors. The key basic point is that a manager should find it far easier to manage a fixed pool of assets rather than a fluctuating pool where they will not know whether investors will redeem or buy. If such a manager is half sensible, he will be taking a real time view on the size of demand expected daily. For example, he could be running a relatively illiquid open-ended portfolio and fear that 10% of the fund may be redeemed. Does he hold the cash to cover that possible redemption, or does he wait until it happens, with different consequences for the 90% that is holding the balance?
As you correctly say, the Woodford debacle occurred because there was an avalanche of sellers, and the manager was forced to sell the liquid stocks until the point where the illiquid ones were the only candidates. They could not be sold, and implosion occurred – a debacle that could occur again with any illiquid portfolio embedded in an open-ended vehicle.
This situation is helpful in some ways, because it should focus all trust Board’s on discount to NAV management/strategies. If a trust has a liquid portfolio, it can behave quite differently from one that has illiquid investments. For instance, a trust with a liquid portfolio could adopt the well proven route of adopting a near nil/nil discount strategy. This is a strategy that should be adopted by more trusts but of course it does create shrinkage risk alongside size growth potential. The market then decides whether growth is appropriate.
One problem seems to be that investors do not understand market liquidity and may in some cases be under the illusion that a portfolio can be sold at or near NAV on a real time basis. I venture to suggest that all trusts should explain the liquidity/saleability of their portfolio.
None of the Saba holdings appear suitable for turning into open ended funds because they hold too many illiquid investments (even though they may be attractive longer term).
Trusts have Boards that are the custodian of investor interests. Open ended funds have no AGM’s or opportunity to vote. There are very key differences that have not been properly explained to investors.
This is a golden opportunity to market trusts and for the industry to sell itself,