Investors turn to investment trusts with inflation protection

Investors have been snapping up investment trusts with exposure to ‘real assets’ to add defensive ballast to portfolios. 

Challenging market conditions led investment trust fundraising to decline 26% year-on-year in the first half of 2022.

Just over £4 billion was raised through solely through secondary fundraising, as 2022 has yet to see its first investment trust initial public offering (IPO).

In the first half of last year £6.7 billion was raised through both IPOs and existing companies. For 2021 as a whole there were 16 IPOs.

However, despite plenty of fear and caution among investors, the amount of money raised by exiting companies is the third highest on record for a six-month period.  

The Renewable Energy Infrastructure sector led the way raising £1.2 billion, followed by Infrastructure (£621 million) and then Property – UK Commercial (£557 million).

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The sector trio invest in “real assets”, which have historically acted as impressive long-term hedges against inflation. As part of a diversified portfolio, real assets can help to reduce risk alongside generating income. Such assets tend to increase in value when there is inflation due to being government-backed. With inflation running at its highest level in decades, it isn’t a surprise to see such trusts proving popular.

As well as having inflation-protection qualities the renewable energy infrastructure sector has also been in demand due to higher power prices following Russia’s war on Ukraine. This has turbocharged returns, with the average trust in the sector up 15% over the past year.  

The largest fundraisings by existing companies were International Public Partnerships (LSE:INPP) (raising £326 million) in the Infrastructure sector, Supermarket Income REIT (LSE:SUPR) (£307 million) in the Property – UK Commercial sector and Renewables Infrastructure Group (LSE:TRIG) (£277 million) in the Renewable Energy Infrastructure sector.

In addition, defensively focused multi-asset funds were also in high demand, with Ruffer Investment Company (LSE:RICA), Capital Gearing (LSE:CGT) and Personal Assets (LSE:PNL) respectively raising £236 million, £217 million and £118 million. The trio have over the years built strong reputations of being protectors of capital when stock markets are volatile. Year-to-date the respective share price total returns, according to FE Fundinfo, are 4.4%, -2.9% and -3.2%. In contrast, the MSCI World Index is down 8.5%.

Each trust has for some time been positioning for a sustained period of higher inflation. Our recent analysis looked under the bonnet to explain how the investment approaches of the three trusts differ.

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Richard Stone, chief executive of the Association of Investment Companies (AIC), points out the investment trust structure is a good fit for real assets, as they are generally illiquid and cannot be readily sold to meet investor redemptions.

"The investment company structure is well suited to these assets, providing permanent capital so managers can take a long-term view of their portfolio and are never forced sellers,” said Stone.

Separate analysis by interactive investor, which looked at the number of buys among customers over a six month period (to the end of May), found an uptick in investor demand for interactive investor Super 60 member FTF ClearBridge Global Infrastructure Income and Renewables Infrastructure Group (LSE:TRIG).

Greencoat UK Wind (LSE:UKW), another specialist real asset fund that owns wind farms in the North Sea, has also been proving popular. It entered our top 10 most-bought investment trust table in April. For the month of June, the trust ranked in sixth place.

On the whole, infrastructure has predictable cash flows that gives the asset class considerable defensive qualities. However, investors should be wary of viewing it as a panacea. Listed infrastructure is an equity, so is correlated to the up and down fortunes of stock markets. Moreover, it is a diverse asset class – comprising both old economy sectors and new economy sectors, such as renewables. Such assets perform differently from one another.