In May 2012 we issued our report ‘Investment Trusts: Why Transparency Matters’. The aim of this report was to demonstrate why we at Morningstar thought investment companies needed to improve their transparency, particularly through the disclosure of full portfolio holdings, on a regular basis.
We were delighted that, soon after, the Association of Investment Companies (AIC) supported this call with their ‘Disclosure of Portfolio Holdings Post RDR’ report in November 2012, which in turn encouraged their member boards to be more transparent.
Following the implementation of the Retail Distribution Review (RDR) in January 2013, we updated our initial Transparency report to assess the extent of the improvements in disclosure of closed-end fund holdings, as well the impact that improved disclosure had had. In just 12 months we saw a near three-fold increase in the number of funds releasing full portfolios on a monthly basis, and a five-fold reduction in the number of funds releasing full portfolios on just a semi-annual basis.
We have now updated this data once more. Two years on, and while the absolute number of funds reporting full and frequent holdings is little changed, those that have been disclosing holdings have embraced much more frequent and regular disclosure than ever before.
These charts show that the majority of investment trusts that are reporting regular holdings data have embraced monthly reporting and that there are very few funds now that only report a full list of holdings on an annual basis.
If we dig deeper, and look at the timeliness with which the holdings data is released to the market, again we can see a very positive trend. As of August 31, of the 122 funds disclosing their holdings monthly, more than half are now releasing this data within 30 days of each month-end, and two-thirds within 60 days of each month-end.
Furthermore, 70% of the assets under management in this list of investment trusts is releasing monthly data to the market. Just 1.2% of the AUM continues to only release their holdings data on an annual basis. While it could be seen as disappointing that the headline number of funds hasn’t changed, the reality is that we expected this to a large degree.
The investment trust sector comprises many alternative-asset funds that invest in unlisted investments, so there is a heightened level of sensitivity around disclosure of these positions. Further, that information would have limited use when running portfolio analytics for clients on a frequent basis as those holdings tend to be much longer term in nature, with infrequent valuations available.
Nonetheless, there are still some investment trusts that invest in listed equities—and a few that hold bonds too--that haven’t embraced better disclosure yet, so there’s potential for that number to increase a little. Furthermore, while some are disclosing the information in their annual and semi-annual reports, they are yet to facilitate its dissemination to data vendors for inclusion in their products. That limits its usefulness for investors and their advisers as they aren’t able to do a full look-through of their portfolio.
We think the improvement in the timely release of frequent holdings data has been driven by a number of factors. Boards have become more comfortable with the concept of releasing holdings data. Company secretaries have become more comfortable with the concept of releasing holdings data, and systems and procedures have been put in place at the asset management firms to enable this data to be sent to the market.
There is also greater willingness and ambition to compete with open-end funds in the search for new investors, and less concern about the data being used detrimentally by potential arbitrageurs. Trusts show an increased desire to have up-to-date data on investment platforms, particularly those where self-directed investors are very active
There has also been recognition of the benefits in having up-to-date data on our Morningstar Analyst Research reports. Indeed, if we look at investment trusts that carry a Morningstar Analyst Rating and assess on the progress made there with regards disclosure, it’s also an encouraging message
How Has Better Transparency Helped Investors?
Tightening Discounts
The Morningstar Investment Trust ALL ex private equity ex VCT unweighted discount index has tightened to just under 6% at 20 October 2014 from 7.6% one year ago, from 9.5% three years ago and from 13.2% five years ago.
The extent of any discount movement varies by sector and by fund but it shows the overall trend is heading in the right direction.
Increased Visibility
There are 20 investment trusts that have appeared consistently among the top-viewed CEFs on Morningstar.co.uk throughout this year, and all bar one of those funds releases holdings monthly or quarterly, with the majority releasing monthly. Further, there is far less of a delay in this data becoming available than ever before, with its more timely release after each month-end. Whilst that’s not the only driver behind their interest—market sentiment at a geographic and industrial level plays a very strong part—nonetheless it’s encouraging that the funds in which investors have the highest current interest are funds that have embraced better transparency for their investors.
This in turn helps those investors understand the funds’ current positioning and thus they can consider its impact in their wider portfolio. That should lead to a better investing experience for shareholders.
Widening Shareholder Bases
Research commissioned by the AIC has shown an increase in investment trust purchases on platforms. This is further supported by the rising prominence of names such as Hargreaves Lansdown on shareholder registers—as reported by asset management firms--suggesting increased interest from self-directed investors.
Asset Raising
In 2014 alone to the end of September, some £4.3 billion has been raised into the sector, on a net basis. This has been through the launch of new funds, through secondary issuance for existing funds, and through tap issuance at funds trading at a premium to their net asset value. In 2013, the sector saw a net inflow of £6.5 billion. Those figures compare with just £1.1 billion in 2012—a pronounced improvement.
Conclusion
The investment trust sector has come a long way in the last few years. Boards and investment managers alike have embraced the need for better transparency, both for the benefit of existing investors but, as importantly, for potential new investors, and are seeing the resultant benefits. As their shareholder base has evolved—and continues to evolve--since the introduction of the Retail Distribution Review, so has the expectation of full and frequent data by investors, in an age where information is so readily available for their peer funds.
Most importantly for us at Morningstar, we believe that investors should have a better investing experience when using investment trusts, now they have a far greater understanding of their investment trusts and their fit within their overall portfolios.
