Investment trusts are where it all began for the UK asset management sector and, given a fair wind, they ought to play a significant part in its future, too. After all, over the past three years, a recurring theme in these ‘view from the top’ profiles has been how end-investors – and, by extension, advisers and asset managers – need to be striking beyond their traditional hunting grounds of equities and bonds to diversify into alternative assets.
And if you are looking to move towards the more illiquid areas of investment, such as infrastructure, property, private assets and so forth, what better way to get there than in closed-ended vehicles, whose managers – untroubled by the prospect of having to sell their best stocks to fund redemptions each time their area of expertise hits a rough patch – really ought to be able to take a genuinely long-term approach to wealth creation?
So far this year, though, any sort of fair wind has been notable by its absence. As Portfolio Adviser reported in August, for example: “Last year was a stellar time for trust fundraising, with new strategies raising almost £4bn and secondary raises totalling almost £11bn. The picture could not be more different in 2022, however, where plans for new trusts have been shelved due to a significantly worse macroeconomic environment.”
While in 2021, 16 new investment companies come to market – 10 up on the year before – any IPOs planned for this year remain firmly lodged in the pipeline, waiting for better conditions to launch. Or as one trust buyer told Portfolio Adviser: “Poor investor sentiment, falling stock markets, rising bond yields and tighter monetary conditions generally are all keeping a lid on new issuance.”
Another noted: “The manager and broker of a new IPO have to convince investors the proposition is compelling enough to go in at launch and pay a small premium for a potentially blind pool of assets with all the risks associated with successful and timely deployment of the capital raised. Often it makes more sense to buy the highest-quality incumbent in that sector if it trades at a discount or is cheap relative to history.”
With investors jittery and likely to continue favouring existing companies over what – when they do come to market – can often be variations on a theme of already-successful trusts, how should those on the other side of the fence be thinking about the sector? For Melissa Gallagher, whose job is to do precisely that in regard to BlackRock’s nine-strong stable of trusts and any future offerings, there is a one-word answer – relevance.
“Everything is about the client,” she asserts. “That always has to be the focus. If you look at our sector, you have three different types of investor, who each account for roughly a third of the overall share registers of investment trusts – the wealth managers and IFAs; the institutions; and the private investors, who are such an important part of the client audience.
“The investment trust boards we work with are our clients too, of course, but, when we are thinking about any and all investors, we are primarily working to make sure the trusts we offer are relevant to them and remain so. Private investors have the freedom to research and buy where they like but wealth managers are often constrained by ‘buy’ lists.
“So we need to make very sure we are offering them exposure they cannot find anywhere else or would have trouble investing in directly – for example, BlackRock World Mining, which is widely held by wealth managers and advisers, or BlackRock Energy and Resources Income. That fund currently has a lot of private investors but, over time, we expect its new focus on the energy transition will see it held more by wealth managers.”
Gallagher arrived at BlackRock in 2018 to become co-head of investment trusts alongside Simon White, with whom she had previously worked at Allianz Global Investors. When White left BlackRock in June, she became sole head of investment trusts – the same role she held at Gartmore between 2008 and 2011 and then at Allianz for the seven years after that.
“One thing I love doing here is making sure an investment trust is still relevant for today’s investors,” enthuses Gallagher.
“Energy and Resources Income is a good example. Two years ago, as the Commodities Income trust, it was 50% mining and 50% ‘traditional’ energy, but we worked with the board to ensure the trust now reflects the energy transition and gives the managers the flexibility to invest where they see suitable opportunities.
“Similarly, with BlackRock Sustainable American Income – which this time last year was BlackRock North American Income – we have put in place a sustainable overlay. Boards are keenly aware of the increase in demand for sustainable products so they will listen to shareholders and evolve the trusts accordingly. You have to ensure your trusts have a USP for investors – or else you need a very good reason to offer them.”
And if Gallagher were to identify a possible gap in the BlackRock stable, what is the process for filling it?
“Any new launch has to maximise the potential of the closed-ended fund structure,” she replies. “It is therefore likely now to focus on illiquid, alternative or real assets and, in exploring these opportunities, I have been working with our EMEA head of specialist clients and investment trusts, Marc Pilgrem, to build a strategy for the future.
“This is a process we are aiming to finalise by the end of the summer and is based on our capabilities and capacity – plus, as you say, an understanding of where the gaps are in the market. It is also very much a collaborative exercise and so we are talking to our wealth manager clients about what they would like to see as well. As ever, we want investors to use our trusts to access assets they cannot buy elsewhere.
“So, if clients told us they would love to have exposure to something but cannot get it anywhere else then, as an asset manager, we would discuss it internally, come up with an idea, discuss that with the clients and, if everyone felt it had traction – that, yes, this is something we are really interested in – then we would talk with a broker. After that comes test marketing and, if that is successful, you build the board and move on to an IPO.”
Broadly speaking – very broadly speaking – investment trusts can be categorised as blunt instruments or scalpels. Assuming, then, most Portfolio Adviser readers tend to view one-stop-shop generalist portfolios as ‘cheating’, let’s focus on the more specialist application of investment trusts. Does the rising interest in alternatives not represent something of an open goal for an investment trust operation like BlackRock?
“The structure of investment trusts is ideal and alternatives have led the way on fundraising,” Gallagher replies. “Many of our investment trusts make full use of the powers available to them – either because they are investing in illiquid assets, such as frontier markets or smaller companies, or they invest in mining royalties, for example. Whatever their mandate, we want to ensure our trusts really use the structure.
“All nine of our investment trusts are currently equity-oriented – so we do not have anything in the ‘alts’ space yet. We are looking at it very closely, however, and we are working on potential launches from a strategic perspective. We would certainly expect any launches to be in private assets or real assets – and that is reflective of the fact almost half of investment trust assets are now in alternatives.
“As things stand, though, our more specialist funds include the Latin American and Frontiers trusts. The latter is run by Sam Vecht, who is constantly travelling the world to find opportunities within the frontier markets. You also have World Mining, which does actually mix in some private assets in addition to quoted securities – royalties and option writing – so it is very niche.
“And then there is Energy and Resources Income, which now invests in 40% mining, 30% ‘traditional’ energy and 30% new energy and allows the managers the flexibility to invest where they want to go. That one and World Mining also both have very good yields and, given the current inflationary cycle, they are the two funds we are issuing on this year – following up on the total of $400m [£344m] issued by our trusts in 2021.”
Value for money
Does the idea of ‘value for money’ have different connotations, depending on whether a trust is specialist or generalist? “Value for money is a big thing for investment trusts, regardless of their mandate,” asserts Gallagher. “It goes back to the trusts’ boards as the shareholders have the reassurance they have the directors there keeping an eye on things for them – and obviously fees, costs and ongoing charges are a key consideration.
“Certainly, when we look at our own fee levels, we want to make sure trust shareholders are receiving value for money. With active management, there are always a range of costs involved and this is particularly true for specialist strategies, such as our Frontiers trust. It requires considerable time and resources to travel to many different places and do the necessary research, which in turn needs to be reflected in the fee.
“Similarly, the World Mining team often go off for three weeks at a time to visit mines and companies around the world. So it is not unreasonable these types of specialist funds tend to have higher fees than the more generalist ones. After all, you don’t find many private investors or even wealth managers investing directly in Kazakhstani equities, say, but we are always conscious of ensuring we provide value for money.”
Finally, then, how does Gallagher see the investment trust sector evolving? What sort of players could emerge as winners and losers? “While the majority of launches over the past decade have come from smaller, boutique houses, the increase in regulation we have seen over the same period means strong risk controls and good internal governance – and, by extension, depth of resources – becomes ever more important,” she replies.
“My role means I attend every board meeting of every BlackRock investment trust and, in each one, I have to think like a board member and consider what is at the top of their mind – and, more often than not, it is risk and governance. Obviously they will be challenging the fund manager from a portfolio perspective, but they also want to make sure all the infrastructure is in place so the company is managed as properly as the trust.
“That infrastructure means, in addition to the investment team, there are teams of company secretaries, of legal and compliance people and of marketing and sales people that arguably come together better – not only from a portfolio perspective but also an administrative one – at a large company than might be the case at a smaller firm.
“More broadly, if you are looking for winners, I have to say it comes back to that word ‘relevance’. It is about making sure existing investment trusts have a reason to exist or a USP, or thinking about what new areas investors want to access but cannot elsewhere – and then communicating the message in the most relevant way to the relevant audiences. In essence – why should people be looking at this investment opportunity?”
What is the best piece of advice you have ever been given?
You will get there – though it may be via a path you didn’t quite expect.
What would be your ‘top tip’ to PA readers to help them run a better business?
Leverage the resources around you – and, especially at the moment, work out what is at the forefront of clients’ minds.
What single issue should most concern professional investors at present?
As I just said – listening to your clients’ needs and concerns. Is it inflation? Is it income? Is it preservation of capital? Clients are going through a really tough time at the moment so you have to understand what they want.
Does anything about your job keep you awake at night?
Nothing really keeps me awake though, weirdly, ideas or solutions to problems tend to come to me very early in the morning.
What most excites you about your job?
Every day is different and there are always new opportunities to evolve. So that means working with my great team and our clients to make our existing trusts more relevant – and then potentially bringing something new to market that investors want but can’t find anywhere else.
If you were head of the FCA, what would be your priority?
To make sure children learn about money and investing from primary school onwards. There really should be a compulsory lesson each week so they build up a good understanding – and starting early would be such an advantage.
What advice would you give to someone starting out in investment today?
Never stop learning or being curious, work collaboratively – and don’t be afraid.
STAND AND DELIVER
To what degree are investment trusts now having to think about brand in their own right and beyond that of the asset manager that may or may not stand at the front of their name? “The BlackRock name and culture is certainly a competitive advantage as each of our individual investment trusts benefits from the wider depth and expertise of the business,” says Melissa Gallagher.
“There are certain strategies – Frontiers and World Mining, for example – that can really only be done by a large organisation with significant resources. The amount of resources that go into the management of those funds – and, of course, the skill and expertise – is incredible. In addition, BlackRock is very strong on risk – our risk platform, Aladdin, is market-leading.
“So you have the broader brand but the individual trust brand is important, too – and it has become much more so over the past few years because of how investors do their research. Yes, on the professional side, there will be face-to-face meetings with fund managers but actually a lot of professional investors – and all private investors – will do their research online.
“And, whenever there is some kind of communication with the end-investor – whoever that is and whether it be through a website, research notes or an annual report, webinars, videos or podcasts – that individual trust brand will be there. That is why we have spent so much focus in the past three years on improving our marketing and honing our message to the end-investors.
“There is now just a fantastic opportunity to speak directly to them and, to reflect that, we have revamped each trust’s annual report and accounts and written to all shareholders to encourage them to attend AGMs and we are working more closely with platforms, too. Investors should know each trust has a real USP, stands for something and will do what it says on the tin – and that feeds through to a trust and reassurance it should deliver.”
With governance such an important consideration for investors, Melissa Gallagher highlights the boards of investment trusts as a major point of differentiation with open-ended funds. “Boards are vitally important in holding the portfolio management houses to account,” she says. “Ultimately – and I think this is absolutely crucial, whether you are a professional or private investor – the directors are there to represent the shareholders’ interests.
“They do this by challenging the portfolio managers on performance and investment process, monitoring demand for the trust and ensuring its rating – its premium or discount to its net asset value – does not become excessive and investors do not suffer significant volatility as a result. Given what is going on in the world, that has become increasingly important.
“Board meetings are not just a case of the investment manager turning up and briefing the directors – lots of different parts of BlackRock attend to meet with the board to discuss the non-investment side as well. And, at every single meeting, the trust’s premium or discount is looked at, which goes back to the point that investors should gain comfort from knowing a board is there, protecting their interests.”
The BlackRock trusts operate a variety of discount control mechanisms, points out Gallagher – for example, Greater Europe has a semi-annual tender offer. “As a result, investors know they can potentially get out at a 2% discount every six months,” she explains. “Obviously, it is at the board’s discretion, depending on market conditions, but it is reassuring for shareholders to have.
“For their part, investors in Latin American – if the trust underperforms or the discount widens beyond a certain level – can take out up to a quarter of their holding at a 2% discount every four years. So the boards are there keeping a very close eye on trust ratings and, even if no specific control mechanism exists, they will step in and buy back shares if the discount widens out to excessive levels.
“And, of course, being a listed company gives all investors great access – so not only is there a full annual report and interim report, there is also the AGM. That gives professional and private investors – and we have a pretty good mixture of both coming along – the opportunity to meet with and listen to the managers and meet with the board as well.”
This article first appeared in the September edition of Portfolio Adviser Magazine