By Spencer Lamb, Fund Director
‘This year, next and beyond, investors continue to want income-focused funds. Times are becoming more exciting with a drive towards sustainability and energy stimulating the economy.’
The London Stock Exchange’s recent annual investment fund conference was this year’s ‘must attend’ for investors, advisers and fund managers.
The live event was also accessible to online viewers and covered a range of the industry’s most relevant topics: from ESG and investing in illiquid assets to the power of retail and the rise of digital and space tech.
Our own Spencer Lamb featured on a panel that gathered to discuss the landscape of listed funds throughout 2021 and 2022. He sat alongside Joe Winkley for Winterflood Securities, Natalie Finlayson from KPMG, John Reed from WLG and Chris Tanner from Foresight Group.
Spencer is a Fund Director in our investment trust team with a focus on a wide range of fund administration services to alternative asset funds. Link Group has over 30 years of experience this sector, supporting more than half of the UK’s real estate investment trusts and providing registrar services to over 40% of UK-listed companies.
It was established on the panel that it’s essential to talk about 2020 before 2021 and beyond.
2020 was a year of shock and surprise for investment funds, but also of resilience. IPOs were dry in the first half of the year, raising just £103m. But H2 looked brighter with the year’s final quarter raising £753m.
2021 took the baton to continue the upwards curve in the IPO market – with £1.2bn raised in the first six months. Total fundraising has also increased; in the first eight months, £8.7bn was raised in the closed-ended funds sector alone. Compared with the £5.7bn raised in all of 2020, this puts 2021 on track for a record-breaking year for fundraising.
Income-producing alternative assets have become more popular, particularly across infrastructure (35% of the total raised) and renewable energy. We’ve also seen growth in other sectors such as private equity and space tech, plus data and logistics.
Spencer reminded us of the pandemic’s impact on investment trusts with some statistics from Link Group’s latest Investment Trust Dividend Snapshot.
Investment trust dividends dipped 3.1% in H1 2021 – the first fall in a decade. But this modest decline for investment trusts is barely a blip compared to the broader dividend wipe-out over the course of the pandemic-to-date.
They have outperformed the wider market by a mile – up 2% compared to a 34.6% fall for UK plc dividends.
Investment trusts keep cash in reserve and can bank some of the big capital gains they have made over the last year and hand these out to shareholders.
It’s one of the most reassuring features of investment trusts that they can smooth out the peaks and troughs in dividend income caused by the economic cycle or big one-off shocks.
The amazing stability of investment trust dividends through the pandemic is a testament to this flexibility. For investors, this regular and predictable income is very welcome.
What do investors want?
This year, next and beyond, investors continue to want income-focused funds. Times are becoming more exciting with a drive towards sustainability and energy stimulating the economy.
But they still want the right due diligence and to know that investment managers have a clear plan for asset management. Investors want to have confidence in their managers – especially with these more niche sectors.
A big change in investor behaviour has been an increased sophistication in credentialing sustainability; they want to see disclosures and the full impact of their funds’ services on the world and its environment.
Environmental, social and governance (ESG)
ESG is becoming increasingly important to investors with a large demand for reporting.
The panel described it as ‘mega trend’ that can’t and shouldn’t be avoided. Investment managers must show that they’re taking ESG seriously, including sustainability evaluations and lifting the bonnet on their services to see the effect they have.
Investors and boards want to know what’s happening now and would happen to a portfolio in different eventualities – such as greenhouse gases increasing the earth’s temperature.
Some investment funds have even pledged to donate a percentage of their NAV to environmental or social issues. ESG isn’t going away; we need to embrace it and get creative to proactively meet investor demands.
Diversity and inclusion
There is ample evidence that diversity on boards adds value for investors. For example, Mckinsey research reveals that the top quartile of companies with a diverse board are 36 per cent more profitable.
It’s well-known that bodies such as the Financial Conduct Authority and movements like the Alexander Hampton Review are helping to accelerate the representation of women in senior leadership positions.
The key to ensuring investors feel confident is the right level of reporting. It should be made easy for investors to understand exactly how diverse their fund’s leadership is; whether that’s gender, age, ethnicity or tenure.
Spencer referenced a recent report by our sister company, Company Matters, on the diversity of FTSE Small Cap and AIM listed company boards – showing progress made and the work still to be done.
The panel agreed that our industry should continue the direction of travel away from ‘stale boards’ and group mentality.
The challenges of retail
Almost everyone now has a smartphone. They can buy and sell shares on the go, often without paying a fee. The number of retail investors is increasing as they have execution over their platforms like Hargreaves Lansdown and can make their own decisions instantly. So what’s the problem?
Fundraising strategy tends to focus on institutional investors. The aim is to be cost-effective and quick-to-market. But the challenge with the uprise in direct retail investors is that they don’t have the capacity to vote. This is still held by the institutional investors who therefore have a disproportionate say in how the fund is run.
The panel agreed that the implications of this need to be considered by fund managers if they are to ensure a fair consultation for good governance.
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