Thanks for the comment. That slightly puzzles me too, although I think part of why private strategies have been so popular is not just returns (which we can endlessly debate on whether they outperform public markets or not) but the lack of mark-to-market pricing. You'd think institutional investors, being "more sophisticated", would be above that, but it seems pretty clear that they like the dampened volatility, even if its totally artificial. Investment trusts don't give you that - they expose the assets for what they are on any given day, and the strategies look a little more ugly in the process - hence the discounts to NAV! Add to that some historically crazy fees e.g. HVPE, the Harbourvest PE fund of funds, had a total expense ratio >4% in 2010. It's now closer to 2% but imagine some of these fees tainted the sector.
PS: I interviewed Oxford PE professor Ludovic Phalippou, and he estimates total fees (including not disclosed ones) at close to 7% https://youtu.be/WKSWrjssSAM at around 34 min
This is a great piece and largely accurate. As a Brit now residing in the US for 18 years, I also reflect on some of the peculiarities of the London market. I've always been drawn to the concept of investment trusts (ITs) and, more broadly, the structure of closed-end funds (CEFs), including those in the US. However, the issue in the UK stems from the history of its market and the way ITs operate, along with the overly comfortable relationships between the trusts and their management teams. It truly represents one of the last bastions of privilege, where less-than-brilliant, often privately educated individuals find themselves in positions of power, essentially preying on the pensions and savings of ordinary people. I frequently hear these individuals, with their affected upper-class accents, offering excuses for underperformance, using condescending language and fabricating endless justifications. Some even become well-known figures. Saba has yet to challenge some of the worst offenders, and I hope they maintain their commitment to this important fight
Thanks. I have similar views on the UK asset management industry in general. You’ve seen some innovation around the edges on the platform side, but I’ve long felt the core, active managers remain a “bastion of privilege” too, and haven’t moved with the times given the rise of passive. I assume most will continue to wither, as the UK merchant banks did post big bang. Not great for UK equity market liquidity but 🤷♀️
“Patriotism is the last refuge of a scoundrel” said Samuel Johnson yet is the main reason why the writer supports SABA.
Perhaps the main reason why closed end funds have failed in the US but succeeded in the U.K. is that they are controlled by their management company in the US but by independent non-executives in the U.K., who can change managers, wind up the trust or buy back shares.
It is bizarre that the writer does not understand that discounts are the result of often temporary imbalances in supply and demand cause discounts. That imbalance is the result of a UK regulatory-enforced aversion to risk taking in investment, unlike in the US.
If you believe that trees grow to the sky and that the Mag7 will outperform forever, go ahead and buy an ETF
I'm not sure I understand this, I'm British! But we're all entitled to our different views. Closed end funds have a place, and make sense to me for gaining exposure to illiquid assets (so long as you recognise the greater challenge of valuations in those strategies). Just not that impressed with the ones I looked at here.
This recent piece on Trustnet (link below), headlined “Investment trusts could return 13% per year in the next five years” is a great example of the hopeful drivel often written about investment trusts. It’s thesis is that the time has come for discounts to revert to their historical mean, therefore there are great returns to be had. Not only that the article implores investors to “act quickly”!
I really enjoyed reading this although on balance I side with the British. I invest in a couple of ITs, where the closed end structure makes sense due to illiquid assets such as private companies and PE. I think the days of
IT trying to just have publicly listed assets is getting passé in an era of ETFs but I was pretty unimpressed by Saba proposals. They had no real way forward and the play to replace boards and award themselves the asset management was unconvincing. I do think though they’ve provided the IT boards the necessary kick up the backside. Be interesting to see how they get on this week.
A great piece, and quite contrarian if you read the UK press.
It puzzles me that investment trusts are so out of favour, but Private Equity and Credit are so hot right now, and with retail clients.
Maybe what they need is a rebranding as well as a restructuring.
Thanks for the comment. That slightly puzzles me too, although I think part of why private strategies have been so popular is not just returns (which we can endlessly debate on whether they outperform public markets or not) but the lack of mark-to-market pricing. You'd think institutional investors, being "more sophisticated", would be above that, but it seems pretty clear that they like the dampened volatility, even if its totally artificial. Investment trusts don't give you that - they expose the assets for what they are on any given day, and the strategies look a little more ugly in the process - hence the discounts to NAV! Add to that some historically crazy fees e.g. HVPE, the Harbourvest PE fund of funds, had a total expense ratio >4% in 2010. It's now closer to 2% but imagine some of these fees tainted the sector.
It's not just me then!
Saba - here's a tip for you👆
PS: I interviewed Oxford PE professor Ludovic Phalippou, and he estimates total fees (including not disclosed ones) at close to 7% https://youtu.be/WKSWrjssSAM at around 34 min
Thanks, I'll take a look. He's done great work on PE fees and returns.
This is a great piece and largely accurate. As a Brit now residing in the US for 18 years, I also reflect on some of the peculiarities of the London market. I've always been drawn to the concept of investment trusts (ITs) and, more broadly, the structure of closed-end funds (CEFs), including those in the US. However, the issue in the UK stems from the history of its market and the way ITs operate, along with the overly comfortable relationships between the trusts and their management teams. It truly represents one of the last bastions of privilege, where less-than-brilliant, often privately educated individuals find themselves in positions of power, essentially preying on the pensions and savings of ordinary people. I frequently hear these individuals, with their affected upper-class accents, offering excuses for underperformance, using condescending language and fabricating endless justifications. Some even become well-known figures. Saba has yet to challenge some of the worst offenders, and I hope they maintain their commitment to this important fight
Thanks. I have similar views on the UK asset management industry in general. You’ve seen some innovation around the edges on the platform side, but I’ve long felt the core, active managers remain a “bastion of privilege” too, and haven’t moved with the times given the rise of passive. I assume most will continue to wither, as the UK merchant banks did post big bang. Not great for UK equity market liquidity but 🤷♀️
Exactly. Much as the country goes (managed decline) so the IT industry will follow.
“Patriotism is the last refuge of a scoundrel” said Samuel Johnson yet is the main reason why the writer supports SABA.
Perhaps the main reason why closed end funds have failed in the US but succeeded in the U.K. is that they are controlled by their management company in the US but by independent non-executives in the U.K., who can change managers, wind up the trust or buy back shares.
It is bizarre that the writer does not understand that discounts are the result of often temporary imbalances in supply and demand cause discounts. That imbalance is the result of a UK regulatory-enforced aversion to risk taking in investment, unlike in the US.
If you believe that trees grow to the sky and that the Mag7 will outperform forever, go ahead and buy an ETF
I'm not sure I understand this, I'm British! But we're all entitled to our different views. Closed end funds have a place, and make sense to me for gaining exposure to illiquid assets (so long as you recognise the greater challenge of valuations in those strategies). Just not that impressed with the ones I looked at here.
This recent piece on Trustnet (link below), headlined “Investment trusts could return 13% per year in the next five years” is a great example of the hopeful drivel often written about investment trusts. It’s thesis is that the time has come for discounts to revert to their historical mean, therefore there are great returns to be had. Not only that the article implores investors to “act quickly”!
https://www.trustnet.com/news/13436683/investment-trusts-could-return-13-a-year-in-the-next-five-years
ITs win hands down where comercial property is cocerned
Very good article - Thanks for taking the time and for sharing, appreciated.
I really enjoyed reading this although on balance I side with the British. I invest in a couple of ITs, where the closed end structure makes sense due to illiquid assets such as private companies and PE. I think the days of
IT trying to just have publicly listed assets is getting passé in an era of ETFs but I was pretty unimpressed by Saba proposals. They had no real way forward and the play to replace boards and award themselves the asset management was unconvincing. I do think though they’ve provided the IT boards the necessary kick up the backside. Be interesting to see how they get on this week.