Investment trusts need to find alternative ways of creating demand and reducing their dependance on ...
Investment trusts need to find alternative ways of creating demand and reducing their dependance on the capital provided by market makers to create liquidity, according to a report issued by the AITC.
The report, written by Simon Colson, director and chief investment officer of Trafalgar Capital Management, set out to investigate the roles of market makers and stockbrokers in providing liquidity in the secondary market for investment trust shares.
Colson has argued that the investment trust sector has become a 'sector of smaller companies' and there is a significant risk more investment banks will withdraw from making markets.
Colson said: 'While it is undeniable that the role brokers fulfil is critical to the efficient dealing of shares of investment trusts, this report concludes that they cannot be relied upon to be the sole providers of liquidity.'
While most brokers feel they are doing as much as they can to facilitate customer business, Colson said there are a number of limitations. These limitations are created by indifferent performance, the quality and quantity of the trust's marketing, the size of the trust and shareholder mix, as well as the willingness of the investment manager to push the trust alongside other retail offerings.
Colson said: 'There is a dislocation developing between the desire to attract retail investors to investment trusts and the relative inability of the institutional stockbrokers to access and service those customers.'
In order to counteract this, Colson said, the real route to new investors for retail-orientated trusts is through existing means. Firstly through the fund manager's retail distribution network; secondly via direct promotion; and thirdly through institutional stockbrokers to private client asset managers.
Colson argues that if investment trusts are to be bought by individual investors or recommended by intermediaries, the buying and selling spread should be no more than 2%, which is the unit trust average after commissions or discounts.
One of the overriding conclusions of the report is that without strong performance, investment trust sales may dwindle.
To improve performance, Colson recommends trusts continue with buy-back programmes and that a large number of small and/or poorly performing funds are eliminated by mergers. He said that if there is simply not enough demand, the sector should, and must, shrink before it can grow again.
Colson added: 'The overwhelming response from brokers and investors alike is that there are simply too many trusts competing for the limited amount of capital available and that the average size of trusts is too small.'
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From 6 April 2019