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Investment Trusts added to Academy of Funds

01 Nov, 2023 | Return|

Square Mile Investment Consulting and Research (Square Mile) has expanded its Academy of Funds to include closed-ended investment vehicles. At launch, 18 investment trusts and investment companies, representing a range of asset classes, geographies, and investment objectives, have been awarded ratings by Square Mile’s 20-strong team of analysts.

While Square Mile has always assessed investment trusts as part of its consultancy services, this is the first time that this research has been made publicly available via the Academy of Funds and formalised through Square Mile ratings. Alongside the traditional equity strategies, investor demand for strategies that offer access to alternative and private assets continues to grow and the investment trust structure is well suited to provide exposure to these less liquid asset classes. The Square Mile ratings will help advisers and fund selectors make more informed decisions over which investment trusts are compelling propositions in this area with the list of rated trusts set to expand over the coming months.

The analysts’ qualitative processes in assessing investment trusts and companies reflect those which are applied to open-ended funds. Central to this are regular face-to-face meetings with the manager or managers responsible for running the strategy where the analysts assess a range of considerations, including the team and their environment, philosophy and process, risks, and performance profile, ESG integration and costs. These help to determine the analysts’ level of conviction in a fund’s ability to meet their stated objective and whether it merits a rating. However, there are certain elements of an investment trust’s structure that are particular to these investment vehicles and therefore also fall within the scope of Square Mile’s analysis, including:

  • The board: the analysts will assess board composition including independence, relevant skill set, diversity, experience, alignment with shareholders and competence.

  • Discount control mechanism: as investment trusts and companies are listed securities, they may trade at a premium or discount depending on market sentiment towards them. Square Mile will consider the efficacy of a board’s actions to control the balance between the supply and demand of the trust’s shares.

  • Gearing: the investment trust structure allows for the potential deployment of gearing via various debt instruments which can amplify gains, losses, and income. The use of gearing and its impact on potential returns and levels of risk will help determine Square Mile’s assessment of an investment trust’s expected outcome and the trajectory of potential returns.

  • Income: at least 85% of an investment trust’s annually accrued income must be distributed to investors. This enables the board to transfer excess income into a revenue account which can augment future dividends. Additionally, dividends can also be boosted from capital reserves where permitted.

Square Mile’s research is strictly independent and fund groups cannot pay to have their investment strategies rated. Instead, the analysts rely on range of sources to identify those funds and trusts that are of interest including their market experience and knowledge, clients and peers, conferences and industry news and developments.

The ratings awarded to investment trusts will mirror those that are currently given to open-ended investment funds as follows:

  • A, AA, and AAA, reflecting Square Mile’s conviction in an investment trust’s ability to deliver on its stated objectives and ability to meet investor expectations.

  • P+ (Positive Prospect), awarded to investment trusts which the analysts consider as having the potential to be highly compelling propositions, but where there are some elements relating to the strategy that the analysts need more time to assess to be satisfied they merit a full rating.

  • Responsible ratings, awarded to investment trusts with a responsible outcome or target incorporated into their objectives or mandate. They follow the same gradations (A, AA, AAA and P+) to express the analysts’ confidence in a manager's ability to meet their objectives with an additional assessment of the potential of meeting the trust’s responsible investment objective.

Jock Glover, Square Mile’s Strategic Relationships Director, said, “Square Mile’s ratings are widely recognised as a kitemark of quality within the investment industry, reflecting the rigorous qualitative assessment applied by our team of analysts. Until now, these ratings have only been awarded to open-ended funds, but we know there to be many excellent investment trusts available to investors, which we have identified through our existing research and consultancy work. It is a natural evolution of our research to include closed-ended investment vehicles within the Academy of Funds, with ratings that reflect our analysts’ conviction in the strategies’ potential to meet their investment objectives consistently. This furthers our driving objective of helping advisers and fund selectors make informed decisions over suitable investment options on behalf of their clients.

“The 18 investment trusts that enter the Square Mile Academy of Funds at launch are all compelling propositions, offering investors access to a range of assets and geographies. This list will steadily expand over the coming months as our analysts award ratings to other investment trusts and companies providing exposure to a broader spectrum of investment opportunities.”

Richard Stone, Chief Executive of the Association of Investment Companies (AIC) said: “We warmly welcome the inclusion of investment trusts and companies in the Square Mile Academy of Funds. Investment trusts have strong long-term performance, unique income benefits, independent boards of directors and are particularly suitable for illiquid assets like property or infrastructure. This research and these ratings will be helpful to advisers looking to select suitable investment trusts for their clients.”

Click here to view all Square Mile rated Investment Trusts

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