Investment trust market trends for 2011

While it’s impossible to predict how markets will perform in a given year, there are some discernible trends in the investment trust market that will continue in 2011, it is claimed.

This year has, apart from the occasional hiccup, seen a continued market recovery that has provided a good support to the investment trust sector, according to experts.

As stock markets have been fairly buoyant there has been stronger demand in many markets, which has helped rein in discounts across the board. This demand is exemplified by the number of investment trust initial public offerings in 2010, some 13 until end of November, raising assets of around £1.42 billion, a report from J.P. Morgan Asset Management.

‘The diverse nature of these offerings has also been very telling. Traditionally, investment trusts have represented a good way to invest in less liquid markets and riskier strategies, so it's not surprising there has been enthusiasm for emerging market funds. In particular, there was strong appetite for Fidelity’s China Special Situations trust and keen interest in J.P. Morgan’s Brazil trust and its Global Emerging Markets Income Trust,’ it says.

In addition, extra flavour has been added to the mix with the launch of more alternative vehicles such as infrastructure, distressed debt and commodities. It is heartening to note, too, that initial strong demand for these offerings has been met by many of these new trusts trading well after launch,’ it explains.

‘So it’s clear that the investment trust universe is more diverse than ever and this level of choice, coupled with strong investor demand, bodes well for the industry in 2011.’

A positive outlook is helped by greater emphasis on transparency. The experts believe that the onset of RDR (Retail Distribution Review) is providing a favourable regulatory environment for the investment trust sector. With most trusts already RDR ready, offering a transparent fee and commission free structure long before the review, access to distribution platforms will mean the ingredients are in place for investment trust assets to continue to grow.

‘Investment trusts, therefore, increasingly represent good value for many types of investor across a mix of strategies and sectors, compared to other options (eg open-ended funds). ‘The merits of natural transparency and attractive charging are driving client demand. When you add these benefits to the diverse opportunities which have already displayed success, if capital markets are open there are grounds for further strong initial public offering activity in 2011 and we expect several more trusts with more distinctive mandates to be launched,’ the report points out.

‘Investors are clearly comfortable supporting well timed offerings. Interestingly a key question seems to be increasingly the continuing support for the manager from the board after launch,’ it adds.

The demand from investors for more complex strategies means that investment trust boards will increasingly need to seek out specialist expertise to manage all aspects of a trusts' operations. Investment managers will need to demonstrate they have the expertise to manage specialist strategies and invest in new areas.

‘For those companies and managers that can meet these challenges, however, and who can evolve with changing investor preferences and requirements, the environment in 2011 for investment trusts promises to further cement the firm industry foundations and growth potential that are already in place,’ the report concludes.