At this time of year, I like to take a look back at the first six months of activity in closed-end funds to see how it compares with the previous year.
Total net inflows to June 30 this year are in excess of £1.25 billion; last year, this figure was £1.45 billion. The detail behind the numbers, though, shows a very different picture between the two years.
In 2010, we saw the high-profile launch of Anthony Bolton’s Fidelity China Special Situations Fund (FCSS), which initially raised some £460 million and did much to attract new money—and attention—to the sector.
This year, we haven’t seen any capital raisings of this magnitude, but the sector certainly hasn’t been dormant. Whereas, in 2010, £1.38 billion was raised through new launches alone, this year that figure stands at a little under £500 million.
We already reviewed the first three months of this year in this previous article so here we’ll take a look at the second quarter of 2011.
In fact, the prominent fund launches all took place in April this year, when we saw three new funds come to the market in addition to a smattering of VCTs. First out was Neuberger Berman’s Global Floating Rate Fund on April 20, with share classes in both USD (NBLU) and GBP (NBLS); NB raised £309.34 million in this fund, the bulk of which was in the GBP share class. This took the number of CEF funds investing in debt to seven.
Until changes in tax law in 2010, the rules were prohibitive for an investment company wanting to hold fixed-income securities: only UK dividend income was exempt from income tax, so any other form of income—such as interest—was taxable.
In 2010, HMRC overhauled this legislation to address this issue and as a result we are starting to see the creation of some fixed-income CEFs. Neuberger Berman is leading the charge here, and manages some 51% of assets in this niche sector (as at July 27, 2011).
The second launch in April was that of Diverse Income Trust (DIVI), which raised £50 million. This is Gervais Williams’ new fund, following his arrival at Midas Capital Partners earlier this year from Gartmore. Formerly the manager of Gartmore Irish Growth, Williams’ background is in the management of small- and mid-cap funds. While the specific income tilt is a new feature for him, he’s familiar with the CEF structure and how it can be beneficial when it comes to paying income to shareholders.
Thirdly in April we saw a new offering from Henderson. Henderson International Income Trust (HINT) raised £41.5 million, which was less than had been hoped by Henderson—it seems not everyone got the HInT. This fund sets itself apart from CEF peers as it’s global but excludes the UK. This a far more common mandate among open-end global equity funds, with a number of fund-of-funds in particular investing along these lines. In Henderson’s favour when compared with these is its lower total expense ratio. While the exact level is yet to be confirmed, Henderson expects it to be less than 1.5%, while the TER of a fund of funds can often be more than 2%.
As well as new launches this year, we’ve seen a handful of new share issues, resulting in increased company sizes. In April, JPMorgan GEM Income (JEMI) raised £26.4 million in its C share issue; then in May we saw both CATCo Reinsurance (CAT) and HarbourVest Senior Loans Euro (HSLC) increase their fund size by issuing C shares, by £75 million and £26 million respectively.
This year has had its disappointments too, though. We’ve seen the launch of new funds pulled or postponed for a variety of reasons, such as Schroder Opus Commodities, Invesco Perpetual Global Income and Aberdeen Emerging Markets Smaller Companies. While we don’t like to see launches not proceeding, this does illustrate well one of the benefits of closed-end funds over open-end funds. All too often, we see firms launch trendy, or ‘hot’, funds in the hope of gathering assets; conversely, we see funds fall out of favour and the resulting small funds can hang around long after their sell-by date, with the investors shouldering the burden of a high TER.
Nonetheless, when looking back at 2009, when we saw net outflows from CEFs of £362 million in the first six months of the year, the trend of the last two years is much more encouraging. It shows there’s life—and growing interest—in the sector.
