Tough market only part of the trouble for failed launches

5 July 2011 | By Stefanie Eschenbacher

After a strong run last year, interest in new investment trusts seems to have ground to a halt. Tough economic times and political tensions, however, are only part of the story.

So far, this year has featured the cancellation or delay of six prominent launches: Aberdeen Emerging Markets Smaller Companies, Fidelity India, Invesco Perpetual Global Income, Kotak Infrastructure, Schroder Opus Commodity and Securis Income.

Only four groups managed to list their investment trusts successfully, although three of those raised no more than £50m - typically considered critical mass for a trust.

The Duet Real Estate Finance and Diverse Income trusts both raised £50m at launch, while the Henderson International Income trust raised only £42m. The Henderson trust’s total was less than one-third of the £150m of assets it initially targeted.

The Henderson trust has an unusual mandate. It invests in global equities, but only outside Britain, and can also invest actively in fixed income. It also uses several managers to invest on its behalf. This puts it in competition with its potential clients among the wealth managers, who often use a similar approach, as well as with Henderson’s own open-ended global income trust.

At the time of the launch, Henderson’s acquisition of Gartmore added an extra degree of uncertainty.

The Neuberger Berman Global Floating Rate Income fund has been hailed as the only exception so far to the low launch levels, raising £310m. A specialist, innovative and diversified vehicle, it offered an income protected from interest rate rises, meeting an important need for investors.

Specialist launches, however, are not succeeding if they are seen to be too expensive. The Schroder Opus Commodity investment trust, which would have had an annual expenses ratio of up to 2.5% of assets, was postponed.

Charges, though not the main factor investors consider when they select investment trusts, can have a significant impact on long-term performance.

Although the investment trust sector is already halfway through the year, it has not raised anything close to last year’s figures.

There were 17 successful listings last year, according to Simon Elliott, the head of investment companies research at Winterflood Securities. The sector as a whole raised £3.9 billion, £1.8 billion of which has come from launches.

Those figures include Anthony Bolton’s Fidelity China Special Situations, which raised £430m in its initial public offering. Although it failed to raise the £630m it targeted, it was still the biggest-ever investment trust launch in Britain.

As the main causes of the uncertainty, investors have named the deteriorating economic environment, sovereign debt problems in Europe, geopolitical risk in the Middle East and the Japanese earthquake and tsunami.

Toby Hogbin, the head of product development at Martin Currie, which runs a range of investment trusts, says: “The British equity market has been in fractious mood for much of this year, with investors concerned about the uncertain outlook and tending to be in a risk off mode rather than risk on. At such times, trust launches will find it more difficult.”

Hogbin says new investment trusts have the added hurdle of convincing investors why the shares should not go to a discount at launch.

“Supply and demand combine to set the share prices of investment trusts,” Hogbin says. “New issues need to offer something new and innovative which is not already available in the secondary market, such as Fidelity China Special Situations, which had a good launch and follow-up issues because investors rightly thought that the shares would go to a premium.”

Elliott and other brokers say that many investors are finding it difficult to commit money to launches this year.

James Budden, the director of marketing and distribution at Baillie Gifford, which also manages several listed trusts, has observed a similar trend. Budden says many big private clients and stockbrokers have been “less keen” on new investments.

Unlike open-ended funds, it is considered essential for investment trusts to reach a critical mass at launch.

Asset managers can launch open-ended funds with a relatively small amount of seed money, build a track record and increase it later through active marketing.

“Open-ended funds do not have to have a critical mass for the launch, but trusts have relatively high costs to start with,” Budden says.

Additional expenses associated with a listing include a board of directors and a company secretary, among other considerations. These are borne by shareholders. Bigger trusts tend to have lower costs.

The list of launches and failed launches also suggests that many asset managers were chasing last year’s successful themes. Income, global income and emerging markets income have been popular.

However, despite high inflation and low yields on cash accounts, appetite for so many launches at once appears to have waned.

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