Boost for funding trusts as disclosure guidelines suspended

Investment trusts are hoping to secure waves of fresh inflows after the Government temporarily paused the enforcement of burdensome cost disclosure rules.

It comes ahead of a post-Brexit regulatory shake-up, part of a Government growth strategy that includes efforts to boost investment into UK capital markets, which have lagged peers in recent years.

Much of Britain’s investment trust sector has suffered heavy discounts to net asset value for some time, meaning the value of shares and total valuations are lower than the sum of their underlying assets.

Efforts to close discounts, via share buybacks for example, have proven largely unsuccessful, which the industry has partially attributed to consumer disclosure requirements inherited after Britain left the European Union.

Trusts are required to make thorough disclosures about their costs and charges. But the rules require institutional investors, like pension funds or banks, to then also report the costs of their investment to their underlying investors.

Industry lobbyists say inflows into investment trusts from institutional investors have effectively been cut off as they are put off by the relatively high level of time and resources required.

The Government says EU rules governing UK investment trusts and other financial sectors are set to be overhauled by 2025, with a ‘Consumer Composite Investments’ regime more tailored to the country’s requirements set to be established.

‘Big bang’ moment?

HM Treasury, the Financial Conduct Authority and City Minister Tulip Siddiq said in a joint statement: ‘Investment trusts are a well-established type of investment vehicle in the UK representing over 30 per cent of the FTSE 250 and investing in over £260 billion in assets in total.

‘They can be a valuable source of investment funding for both conventional and emerging asset classes.’

However, the statement noted that valuations and discounts of investment trusts ‘may be influenced by many factors, independent of regulation’, such as investment performance, overall market sentiment and the interest rate environment.

Managing director of Gravis Advisory, which is behind the VT Gravis UK Infrastructure Income Fund and the VT Gravis Clean Energy Income Fund, William MacLeod said: ‘What’s happened today is a lot less dramatic than the big bang in the 80s, but for those of us in the sector and all investment company investors, it is no less seismic.

‘It is momentous breakthrough that is long overdue. The campaign group – helped immensely by the support and dedication of Baronesses Bowles and Altmann – has worked tirelessly for these changes for a number of years now and today is a day of both relief and celebration.

‘Righting this wrong is profound for the UK market, the sector, and investors of all sizes.’

Ryan Hughes, interim AJ Bell Investments managing director, added: ‘The unintended consequences of the current legislation created an unequal playing field that put investment trusts at a disadvantage and threatened, in some cases, their very existence.

‘The removal of this unnecessary barrier will help the investment trusts sector regain its footing and allow them to compete equally against other investment structures, which will put them back on the radar for investors who have been reluctant to use them given the cost disclosure requirements.

‘At a time when the Government is looking to encourage investment in the UK and to encourage private capital to drive economic growth, the removal of any barriers that could hold this back should be viewed positively.’

‘Lost years of investment’ for infrastructure

Companies invested in illiquid assets, such as infrastructure, have been even more impacted by wide discounts.

High interest rates have driven investor caution over higher debt costs, long duration portfolios and the potential for a sharp downgrade in asset valuations.

Abrdn research shows infrastructure trusts are on track for their first ever three-year gap with no primary capital raised, which the asset manager says ‘reflects the dual impact of a higher interest rate environment and the cost disclosure rules’.

Data from the Association of Investment Companies shows London-listed infrastructure trusts currently trade on a average discount to NAV as 14.9 per cent, ranging from 5.9 per cent for 3i Infrastructure and 57.8 per cent for Digital 9 Infrastructure.

Christian Pittard, head of closed-end funds at Abrdn, said: ‘The new Government has made boosting economic growth – by channelling capital into areas like renewable energy and infrastructure– its raison d’etre.

‘These funds already invest billions into these areas – delivering crucial economic growth projects. 

‘However, cost disclosure rules, which have amounted to a distortive ‘double counting’ of costs, have negatively impacted investor sentiment, therefore choking flows into investment trusts.’