4 days ago
Why I'm ignoring Rachel Reeves's investment tips
As a relatively new mum, I recently stumbled across some top-tier parenting advice on Instagram. In a charming video, a fellow parent told me: 'You can't make a happy baby happier.'
The idea is that if your child is occupied and settled, do not interfere under any circumstances. You might think that they could play with their piano 'the right way', but in fact bashing the entire toy against their teddy bear is working just fine. If you disrupt them, they may not be happy playing with the piano at all.
I suppose it's a parent's take on the idiom 'if it ain't broke, don't fix it' — a mantra that Rachel Reeves should perhaps observe.
In her speech to investment bigwigs at Mansion House last month, the chancellor outlined a series of reforms that she hopes will create a nation of investors. As part of it, we will all be allowed to hold long-term asset funds in our stocks and shares Isas.
Long-term asset funds, or LTAFs, were introduced in 2021 for those who wanted to invest in long-term, illiquid assets such as private equity or infrastructure. These types of funds are designed to hold the sort of assets that typical investment funds struggle to buy and sell fast enough to meet investor withdrawals. The initial target audience were managers running defined contribution pension schemes.
Many analysts say that these sorts of investments are not suitable for most investors. They often involve businesses that have high rates of collapse and assets that can take years to sell. Returns can be volatile, and detailed information about the companies involved is tricky to get your hands on.
But even outside this argument, Reeves's LTAF push ignores the fact that there is already a long-established, successful method for ordinary investors to invest in assets such as infrastructure, property and private companies: investment trusts.
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These trusts are similar to investment funds in that they aim to make money for their investors by buying shares and other assets. The difference is that, unlike investment funds where you buy units in a fund, investors buy and sell shares in investment trusts on the stock exchange the way that they would buy or sell shares in Lloyds Banking Group or Microsoft. This means that the price you get for your investment when you sell is generally determined by what someone is willing to pay for it on the open market.
It also means that they are the ideal home for the type of long-term, illiquid assets that Reeves is pushing through LTAFs. You can sell your shares whenever you want, without needing the trust's manager to sell any of their investments.
As Laith Khalaf from the investment platform AJ Bell puts it: 'For retail investors, LTAFs are a solution to a problem that never existed.'
And because they are companies in their own right (you may see them referred to as 'investment companies'), you can easily access them through most investment platforms.
'LTAFs are a total waste of time for private investors. Investment trusts are already excellent vehicles for investing in illiquid assets,' said Ben Yearsley from the wealth manager Fairview Investing. 'And LTAFs will struggle to take off unless they are easy to buy on investment platforms. Platforms do not like anything that is unusual and isn't dealt on a daily basis, and LTAFs are likely to have quarterly or six-monthly dealing.'
Investors can also feel confident about investment trusts' past performance, although as any T&Cs worth their salt will tell you, this is not indicative of future returns. The data company Numis found that over ten years investment trusts outperformed investment funds in every sector except for the UK small-cap and Japanese small-cap sectors.
It's worth saying that the investment trust world is not without its problems. There has been a prolonged spell of poor performance, and discounts (when an investment trust's share price means that its value is less than the value of the assets that it owns) have widened significantly over the past few years, but things seem to be moving in the right direction.
Discounts have narrowed since the start of the year — so share prices are moving skywards — and some investors have done well from buyouts, mergers and share buybacks. In fact, a recent buyout of the Downing Renewables & Infrastructure trust means that there is an infrastructure-focused investment trust hole in my portfolio.
And I don't need to wait for LTAFs to become available in my stocks and shares Isa to fill it. The options in the investment trust world are plentiful.
In infrastructure, the best performing investment trust over the past decade is 3i Infrastructure. It has a total return (including dividends) of 178 per cent over the past ten years and takes more of a 'private equity' style approach to infrastructure investing (so there is slightly more equity-style risk).
If I wanted something that specifically invests in renewable energy infrastructure, as my previous holding had, then the top performers include Greencoat UK Wind, which has a total return of 78 per cent over ten years and Foresight Solar, up 64 per cent.
A report last year by the consultancy PwC estimated the total global requirement for infrastructure investment to be about $3.9 trillion (£2.9 trillion) a year. Once you add in the Labour government's pledge to double onshore wind, triple solar power and quadruple offshore wind by 2030, alongside its plans to overhaul planning laws, then the combination of infrastructure and renewables seems a potential winner.
There are, of course, ways in which the investment trust sector could improve. At the moment there are too many trusts available, it is still reeling from the Saba saga, where investor activists bought up shares in trusts to try to force through changes, and discounts could be narrower.
But as a place for investing in long-term illiquid assets, it is certainly a happy one. And as I have learnt from my young son, Reeves is unlikely to do much good by trying to make it happier.
