Winterflood Monthly Report - March 2021
Monthly Reports
Retail demand tested by recent volatility
One of the key drivers of the Investment Companies sector over the last ten years has been the marked increase in demand from retail investors. This has been reflected in the growing presence of retail platforms, such as Hargreaves Lansdown, AJ Bell and Interactive Investor, on the registers of a large number of funds. The demand has been a key factor in the sector’s long-term re-rating. Certainly retail investors appear to have been less discount sensitive and happy to invest in funds that were trading on premiums to their NAVs. Regular issuance programmes have flourished as a result, with the improvement in liquidity for many funds in the secondary market. However, some commentators have warned that this retail demand may prove fleeting, particularly in the event of a market set-back, which could in turn lead to greater discount volatility.
The events of recent weeks appear to have tested this theory. The rise in inflation expectations has led to a repricing of highly valued growth companies, with a negative impact on a number of funds. For example, after hitting a share price of 1,415p on 15 February, Scottish Mortgage has seen a decline of 29%, with a marked increase in its daily traded volume. While some investors will no doubt take fright at the recent levels of share price volatility, others will take a long-term view and see it as an opportunity. We believe that it is important for those funds that previously issued new shares at premium ratings to be as prepared to buy back shares at a discount when necessary in order to reduce discount volatility, particularly with their retail investors in mind.
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