Offshore or onshore investment trusts?
Should investors pay much heed to domicile when investing in an investment trust IPO?
The first half of 2014 has very much mirrored what we saw last year, certainly from a new issues perspective. The investment trust sector is going full throttle, with the sector raising £1.8bn so far this year. This is almost neck and neck with the £2bn raised at the equivalent stage last year, which itself was a good year for initial public offerings (IPOs). So far, so good.
The eight new issues we have seen this year also follow a similar theme to recent years. IPOs have tended to be in peer to peer lending, distressed debt, property through to renewable energy infrastructure. In short, new issues are tending to be in those niche, specialist, illiquid sectors which the closed-ended structure lends itself so well to as there’s no pressure to sell assets to meet redemptions, enabling managers to take that all-important long-term view. But again, one key, unifying theme has been income. The new launches we have seen have tended to be in higher yielding sectors, with six of this year’s IPOs offering target yields of 6% or above.
Commenting on the suitability of the investment company sector for these types of launches, Winterflood explain that of this year’s new issues, the “asset classes would be difficult, if not impossible, to access through an open-ended fund, due to their underlying illiquidity.” Interestingly, Winterflood also point out that last year’s nineteen IPOs are currently trading at an average premium of 5%, reflecting the current strong demand for this type of asset class.
Of the eight new issues we have seen this year, only three are domiciled in the UK, with the rest domiciled in Guernsey or Jersey. In fact, over the last ten years, the ten largest UK domiciled investment company IPOs (investment trusts) raised £1.7bn, whereas the ten largest offshore IPOs have raised considerably more – £8.2bn over the last ten years. So the offshore sector is tending, on the whole, to be the favoured domicile, although by no means exclusively.
What does this mean for investors? Should domicile have a bearing on investment decisions? In actual fact, there are far more similarities than differences between UK investment trusts and offshore closed-ended investment companies. They are all closed-ended, listed on a stock exchange, with an independent board of directors. All have the freedom to gear (borrow) to enhance returns and all have similar investment flexibility, for example, to invest in unlisted assets. From a corporate governance perspective, all have to report against the Combined Code.
One difference between offshore investment companies and UK investment trusts would be that generally no stamp duty would be payable on the purchase of offshore company shares, but would be payable on the purchase of investment trust shares. Also, UK investment trusts can benefit, depending on the nature and location of their investments, from the UK’s extensive double tax treaty network. This can reduce or eliminate overseas withholding tax on income. Non-UK companies may not be able to benefit from the same arrangements.
Ultimately, choice of domicile is a commercial issue for the company which may rest on factors (such as familiarity with different regimes and how detailed rules may affect specific investment practice), which may not be critical to shareholders. Over the years, the UK and the Channel Islands Guernsey and Jersey have converged in many respects so that tax and regulatory standards are not such an issue. To summarise, closed-ended offshore and onshore investment companies look and feel very much the same.
Naturally, fund raising in the investment company sector is very much influenced by market conditions and sentiment. So, with that in mind, let’s hope that the second half of the year is as strong for fundraising as the first!