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Europe sees strong demand for investment trusts
Investors seek alternative sources of income as companies slash dividends amid Covid-19
26 Aug 2020 | The Asset

Europe is seeing a strong demand for income-yielding trusts amid the coronavirus pandemic. “As companies have slashed dividends in recent months in response to the financial impact of Covid-19, open-end income-paying funds have been faced with a dearth of dividends to rely on,” research and consultancy firm Cerulli Associates said.

“However, the structure of investment trusts is such that managers can hold some income in reserve in order to continue making payments or even increase dividends during periods when income is difficult to generate. Unlike many open-end funds, investment trusts can also use profits to pay out dividends.”

Fabrizio Zumbo, associate director of European asset management research at Cerulli, says equity income and global equity income trusts in the United Kingdom have been gaining attention among investors seeking alternative sources of income in the current market.

Although only one investment trust was launched during the first half of 2020, according to the Association of Investment Companies (AIC), innovation has continued, with a focus on corporate activity such as mergers, acquisitions, and changes to management contracts and strategies. AIC data shows that between January and June 2020, six investment trusts changed managers, continuing a trend that started in 2019.

Investment trusts have raised more than 3 billion pounds (US$3.9 billion) so far in 2020, according to AIC figures. Of the five sectors that raised the most funds, four are income-generating alternative sectors, with the infrastructure and renewable energy infrastructure raising 437.1 million pounds and 376.1 million pounds respectively from January 1 to July 24. The top sector was UK commercial property, which attracted 443.0 million pounds during the period.

Across Europe, investors confidently added to their fund positions, with June becoming the first month in 2020 when net new flows into long-term funds exceeded 50 billion euros (US$59 billion).

Investors seem to be pinning their hopes on a combination of the historic amounts of stimulus provided by governments worldwide and a return to business activity, Cerulli notes. It adds: “The top 10 actively managed funds by net flows were all money market products, driven by investor caution as well as businesses shifting their capital, potentially readying to deploy elsewhere as a sense of normality resumes.”

June also marked the third consecutive month of positive sales for Europe's passively managed assets, following a sell-off in March. In the second quarter, passively managed assets gathered net inflows of 42.5 billion euros.

Exchange-traded funds (ETFs) in Europe garnered 13.1 billion euros in net sales in June, up 67.5% from the previous month. Bond ETFs accounted for 7.8 billion euros of the net inflows, followed by equity ETFs, which attracted 4.5 billion euros.

Mixed-asset ETFs was the only asset class to register negative net sales during the month, losing 19 million euros in redemptions. Index-tracking funds registered net inflows of 2.6 billion euros, an increase of 19.2% on the previous month.

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