Why Listed Funds Are Proving A Popular Way To Invest
It would be fair to say the listed funds market has been bumpy over the past few years. However, that's not to say that there have not been a number of success stories as well.
As a continuing theme, secondary issuances from existing listed funds have performed well in the first half of the year. You will not be surprised that it is immeasurably easier (for the right fund) to win a second investment from an existing investor than it is to close investors into an initial public offering.
Secondary issues which have performed well over recent months include the popular Hipgnosis Songs Funds, The Schiehallion Fund and Chrysalis Investments, each a Guernsey listed fund, which between them raised around £875 million.
In the primary markets, speaking broadly, investors continue to eschew complex or layered fee structures, instead seeking simple fee arrangements and clear messaging over investment policies.
It can be a little brutal but managers often seem to have just one or possibly two opportunities to get it right with investors – building a book can be a challenge. For the right fund or manager with a successful track record, however, this can be easier.
The focus remains on income generation and, accordingly, certain asset classes are better equipped to deal with this. However, any asset can be "wrapped" in a listed fund wrapper. For example, a listed fund may make investments in other investment funds, shares, loans, infrastructure, property, student accommodation, planes, ships, wind farms, solar energy, intellectual property… the list goes on.
In terms of reasons for establishing a listed fund, here are just few:
Tax-efficiency – funds are structured to be tax-efficient, meaning that investors (after the fees of the investment manager and other service providers etc) are treated as if they had invested in the fund's assets directly, insofar as is possible.
Permanent capital vehicle - a listed fund will often have no fixed life and there will be no ability for shareholders to redeem or withdraw their investment from the fund. Shareholders exit their investment by selling their shares on the relevant stock exchange. This means that the invested capital in the fund cannot be reduced by shareholders withdrawing their investment.
Exposure to assets not otherwise available to single investor / spread of investment risk – one of the benefits of pooling investment with other investors in a fund is that an investor can gain exposure to assets which may otherwise be unavailable to a single investor; for example, a fund which invests in renewable energy projects. In addition, certain funds will be required to make a minimum number of investments to spread investment risk (or, in other words, the fund won't put all its eggs in one basket).
Regulated entity – the fund will be subject to regulation in its place of domicile (for example, Guernsey) and by virtue of its listing. For example, funds listed on the Main Market of the London Stock Exchange (LSE) will be subject to the UK Listing Rules, whereas funds listed on The International Stock Exchange (TISE), formerly the Channel Islands Stock Exchange, will be subject to the TISE Listing Rules. These rules (and others) will seek to protect investors by requiring the timely disclosure of information and monitoring of investment risk.
Liquidity – as noted above, shares in a listed fund are publicly traded, so as long as a seller can agree on a price with a buyer, they will be able to sell their shares.
In terms of what's next for listed funds, we are seeing continued interest in funds looking to invest into the technology and infrastructure sectors and a surge of interest in SPACs (special purpose acquisition companies) which are targeting a listing on Euronext or the NYSE – and there are also others waiting in the wings for a potential easing of the conditions to listing a SPAC on the LSE. The listed fund industry, despite the aforementioned bumpy ride of the past few years, has proven its resilience and continues to offer investors multiple benefits. The ease of establishment, a streamlined process, lower operating costs, and the important safeguards of transparency and scrutiny make for an attractive combination in an alternative fund structure, and it will be interesting to see how this landscape continues to see evolve over the coming years.
Craig Cordle is an Investment Funds Specialist and Partner at Ogier in Guernsey
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