How BREXIT might affect the underlying performance of investment company portfolios over the long-term remains to be seen. In these early days, equity markets are holding up well, up about 5%, and the sector’s exposure to overseas assets has helped in light of the fall in sterling. On a less positive note, there has been a general widening of discounts across the sector, and particularly in areas such as property.
However, there are good reasons to believe that, whatever the longer-term implications of BREXIT, the investment company sector is well-positioned.
Firstly, the record levels of fundraising by the sector over the past three years has been driven largely by the demand for income, in particular alternative sources of income, most of which are illiquid (infrastructure, property etc). As we have seen in the open-ended world, holding property in an open-ended structure can give rise to problems at times of market volatility. If investors were aware of this risk in theory before, they are now seeing it in practice, and it should remind them of the intrinsic merits of the closed-ended structure where illiquid assets are concerned.
Whereas a few months ago, speculation was all about when interest rates would rise, it is now about whether they will be cut further. This suggests that income seeking investors will have to wait some time before seeing a decent income from more traditional sources. This perhaps explains why, although IPOs have slowed down a lot this year, fundraising by existing investment companies with a good yield remains strong, at around £2bn.
We should also remember that more than a third of the AIC’s members by assets are already domiciled outside the EU (mostly in the Channel Islands), and are in strong demand from investors in the EU (mostly in the UK). There is no reason why the ability for non-EU investment companies to attract investors should change when the UK eventually leaves the EU.
No-one can predict exactly how BREXIT will pan out. But for the investment company sector, the drivers of its recent success are still very much in place and there is no reason to believe it cannot continue to thrive whatever the final outcome of the BREXIT negotiations.
Ian Sayers, Chief Executive, AIC.
