BlackRock's innovative trusts scope unusual sectors

BlackRock has 11 investment trusts in its suite, representing £3 billion of assets under management.

It might not be the biggest collection in the closed-ended fund industry, but Simon White, head of investment trusts, thinks it's a strong one.

He runs through the list: "We have emerging markets-related trusts, one eastern Europe, one US, the Frontiers trust; two have a smaller or mid-cap bias, we have CFD [contracts for difference] exposure, we cover resources, and we have an income and growth trust."

White says BlackRock's specialism is in sectors that are less liquid and more difficult to invest in - Sam Vecht's Frontiers trust being a prime example. He points out that the closed-ended structure lends itself well to investment in these niche areas, because it means the manager is able to take a longer-term view.

"It is ironic that the Frontiers trust is so popular now," he says. "The earliest trusts were set up to enable people to invest in what were the emerging markets at the time, in interesting and unusual ventures.

"As investors, we have come full circle. But while our ethos as investors might have stayed the same, the markets now emerging have changed. We are continuing that trend of allowing investors access to areas they can't otherwise get to."

Distribution review

But the availability of interesting locations and investment sectors is not the only thing driving people's attraction to trusts.

It has now been a year since the Retail Distribution Review (RDR) came into force; its implementation was widely expected to give a boost to investment trust popularity, as independent financial advisers would have to consider them for clients as a possible alternative to open-ended funds, and their lower costs, general structure and tendency to outperform over the long term should work in their favour.

But the proof of the pudding is always in the eating. White says there does seem to be an increasing number of private investors looking to trusts, particularly those buying direct online rather than through advisers.

"I think trusts are particularly well-suited to private investors because of their long-term view, and because I think people value having a second set of eyes in the form of a board of directors with the power to make changes," he explains.

White estimates that around 15 to 20% of inflows are now coming from self-directed investors. The consequence is that share price discounts to trust net asset values have come insignificantly.

BlackRock Smaller Companies, for instance, moved from a discount of around 15% to 4.5% between December 2012 and December 2013. However, White does admit that this could simply be a result of investors looking for greater small-cap exposure while the sector is flourishing, and taking advantage of what he calls an "anomalously high" discount.

Quite often an investment trust will run alongside an open-ended counterpart run by the same manager with a very similar mandate, giving investors access to the same investment strategy through different investment vehicles.

This is not really the case at BlackRock. There is no Latin American unit trust, nor a Frontiers open-ended investment company - Vecht has been very firm on his desire to remain exclusively in the closed-ended arena, apparently.

"There is the Gold & General fund, but that doesn't really do the same thing as the World Mining Trust," points out White.

Innovative approach

But again it comes back to the company's focus on difficult, illiquid areas of investment.

"Commodities Income, for example, was set up to use the trust structure to create income and get exposure to the quoted commodity sector. You wouldn't be able to maintain that element of sustainable income with a unit trust, because you don't have the ability to use your reserves or to write options," explains White.

And as well as the investment style suiting the vehicle, White also believes it suits the skills of his managers.

Royalties create an attractive income stream without some of the cost exposure that investing in equities and mining stocks has."

"I think we have been innovative in bringing the resources of BlackRock, and the skills we have in the group, to the closed-ended structure," he says.

White points to the World Mining Trust as an example of where the experience and resources of the team has "allowed us to manage the trust in an innovative way that uses the structure to its best effect".

With some encouragement from the board, a greater emphasis on dividend distribution has developed within the trust, and its yield has increased from 2.4% in December 2012 to 4.4% a year later.

That has been achieved by investing in "royalties"; for example, a royalty holding in a mine in Sierra Leone pays the trust a proportion of the mine's output over a 20-year period.

"That creates an attractive income stream without some of the cost exposure that investing in equities and mining stocks has. You can only do that in a closed-ended fund," explains White, again championing his side of BlackRock's global business.

Another quality unique to trusts is, of course, gearing. There is no house policy on this, but White says most BlackRock trusts will be limited to a maximum of around 20% gearing, and will typically have around 12%. Because many of the markets the trusts are invested in are volatile, White says gearing must be "employed judiciously" and not leave capital overly exposed.

Skin in the game

A further area where there is no house policy is over the question of whether or not managers must have "skin in the game". White says managers are not forced to have their own money invested in their trusts, but they frequently do.

However, some may be reaping further benefits in the form of performance fees. Although these are a bone of contention for many investors, White says "there is definitely a case for them". He believes performance fees align the interests of a trust's manager with those of shareholders.

"Most of the problems that have arisen from them in the sector are where the fee benchmark appears to be not correctly thought through, but I think that with a correctly chosen benchmark it's a good structure for medium-term measurement," he adds.

Our range, compared with those of other competitors, isn't a complete range."

White is understandably positive about the trusts he oversees, but every company has an area it would like to improve upon.

"We would like to have a broader range of trusts. I think it's true to say that we are a relatively new participant to the industry compared to the F&Cs and the JPMs, and we are keen to build," he admits. "Our range, compared with those of other competitors, isn't a complete range."

White says he keeps an eye out for opportunities to pitch for a mandate, but the chances come up infrequently. Launching a trust from scratch, he adds, is even harder.

"It is possible to launch trusts in sectors where demand is strong and there is little choice for investors, such as North America, but if the sector is trading at a discount and it's not in vogue the prospects are reduced," he explains.

Still, with inflows increasing and demand from private investors on the up, prospects could improve. White thinks the concept of trusts is enjoying "something of a renaissance" at the moment, and that there is an appetite in the market for infrastructure and alternative assets.

It does sound as though plans are afoot for a launch in 2014.

"We are looking at expanding the stable through new issues, where we think we can bring our skills and create attractive products for UK investors," he says.

But where that expansion will be, he will not say. The Far East, perhaps, where White points out that BlackRock has no presence? Watch this space.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.