The London Stock Exchange has reported that the number of smaller investors buying into listed investment funds is steadily growing, but at the same time, retail brokers are not playing as much of a role as they would like. The remarks were made at a recent investment funds conference hosted at the LSE offices in London which looked at the state of the UK investment trusts sector.
Overall, the UK listed funds sector looks in rude health. In 2021 over $20bn was raised for funds, a lot of that cash being directed towards funds investing in the green energy economy. A total of $4.9bn was raised by green closed ended funds in 2021. Other new assets classes included space technology, hydrogen and digital infrastructure. Investment trusts are obviously becoming a valuable route to channel private capital into emerging technology.
Closed ended alternative funds performed well
Growth in so-called alternatives has also been impressive, with a +12.5% CAGR. Apart from debt, all the closed ended alternative strategies available in the London market saw growth in 2021. “Alternatives are a code name for illiquid assets, said Darko Hajdukovic, Head of Platforms and Product at the London Stock Exchange. “The fund structure is very well-suited to providing investors with exposure to underlying illiquid assets.”
Alternative funds listed on the exchange performed extremely well during the pandemic, recovering more quickly than the vanilla long only funds.
“We have seen a steady growth in overall liquidity with over half a billion dollars in daily trade volume,” said Hajdukovic. “This is still less than what a commercial company would trade, which is inherent in the structure. I have to point out that we are five times more liquid than New York. There are regulatory reasons why this could be improved and we are trying to explain this to the regulators.”
There are currently still over 450 investment funds listed on the exchange, but many of these are still under £100m market cap.
Retail broker volumes doubled since 2016
Retail broker volumes in the funds market have doubled over the last five years, but it is still a very institutional ball game. There is only 10% retail broker participation in the market, despite this increase in volumes. Hajdukovic says there is plenty of further scope for retail growth. Retail participation at the IPO stage for investment trusts has picked up considerably, and this is providing private investors with more access to private equity and infrastructure opportunities.
The funds market is currently trading at a 4% discount overall, but alternative trusts are trading at a premium. The discount to premium dynamic remains a problem for many investors, but Hajdukovic says that this is in many ways “a false concern”. Every fund has this dynamic, even open-ended funds, which reflect this in a decline in the net asset value of the fund. The question is really one of whether the investor trusts the market to make the price, in the case of a listed fund, or the fund manager himself.
