Although at Wells Gibson we create client portfolios using Open-Ended Investment Company (OEIC) funds as opposed to their closed-ended counterparts, we thought it would be worthwhile acknowledging that fund assets managed by investment companies have surpassed £200 billion for the first time.
An investment company often referred to as an investment trust, is a form of a collective investment fund. It has a closed-end structure, which differs from unit trusts or open-ended investment companies (OEICS), where new units are created and cancelled based on investor demand.
With an investment trust, a fixed number of shares is in circulation, with the share price fluctuating based on the underlying value of assets and investor demand for the shares. This closed-end structure makes it easier for investment trusts to invest in illiquid or less easy to trade assets, as the fund manager can take a longer-term view.
Shares in investment companies are traded on a stock exchange, just like other listed companies. Each has an independent board of directors, who are responsible for looking after the interests of investors.
An interesting feature of investment companies is their ability to borrow money to invest. This is known as ‘gearing’ and can result in additional profits from investing, once the cost of borrowing is covered. The investment company sector passed the £2bn milestone to record assets under management of £200.3 billion on 31st July 2019. It’s been an impressive run for assets in the sector during the past few years.
Assets have doubled in less than seven years, after reaching £100 billion at the end of January 2013. Nearly half of this growth during the period has come from investment companies investing in alternative assets, rising from £34.7 billion on 31st January 2013 to £80.3 billion on 31st July 2019, a rise of 46%.
Investment companies can invest in a much more extensive range of assets than other types of investment funds. However, these assets don’t always have an expected return. They set out their approach to investing in their investment policy.
Ian Sayers, Chief Executive of the Association of Investment Companies (AIC), said:
“It’s good news that the investment company industry is growing strongly, reaching a record £200 billion of assets at the end of July. This growth demonstrates the adaptability of investment companies, which have been helping investors meet their financial needs for more than 150 years. It reflects growth in mainstream investment companies which are investing in cutting-edge opportunities such as technology, healthcare, frontier markets and venture capital.
“As investment companies are the natural home for illiquid assets, it is not surprising that a significant part of this growth has been in the alternative sectors, which are often invested in assets that are harder to sell such as property and infrastructure.
“Investment companies’ income advantages have also come to the fore in the current low interest rate environment. Many investment companies have increased their dividends for decades, making them highly sought after in recent years.”
At Wells Gibson we believe sensible investing requires a systematic approach which is why we favour Open-Ended Investment Company (OEIC) funds as opposed closed-end investment trusts.
If you would like more information please contact Wells Gibson.