UK investment trusts that are taking on thematic ETFs
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Having agreed to pay £16.5m for a 63 per cent stake in thematic exchange traded fund provider Rize, AssetCo has delivered the latest vote of confidence in a growing industry. Thematic ETFs are a promising area for any provider: the level of assets in such funds reached a new high of €32.4bn across Europe in the second quarter of this year, according to Morningstar.
The products available continue to broaden out: nine new thematic ETFs hit the European market in the second quarter of 2021, a figure that puts 2021 in line with the record 17 launches for the whole of 2020.
And yet many thematic ETFs can be extremely blunt tools accused of several wrongs, from taking outsized stakes in small companies to not offering a pure enough play on a given theme. Now, investment trusts are turning to the thematic space — although the more targeted approach some appear to take could come with greater risk.
The thematic label can capture some big trends, from the clean energy transition to ageing demographics and the future of food production. The term also tends to apply to funds targeting even more innovative sectors.
The latter area is where trusts have most recently started to crop up: in keeping with growing excitement around space exploration and associated activities, the Seraphim Space Investment Trust raised just shy of £180m as part of its recent initial public offering, introducing a rival to the Procure Space UCITS ETF (YODA) that launched at the start of June.
Separately, in one niche of the clean energy space, the HydrogenOne Capital Growth investment trust (HGEN) has just raised some £105m in net proceeds via an IPO. The trust will provide an alternative to the L&G Hydrogen Economy UCITS ETF (HTWG) and VanEck Vectors Hydrogen Economy UCITS ETF (HDGB) that emerged earlier this year.
Trusts versus ETFs
Some differences between these thematic ETFs and their investment trust rivals are immediately apparent. One of them relates to the long-running active/passive debate: the teams behind the trusts might argue that their expertise and selectivity should pay dividends via a targeted approach that may not be available by tracking specially constructed indices. The hydrogen trust, for one, is to be run by JJ Traynor, a veteran of the energy market, and Richard Hulf, former Artemis energy fund manager.
The space trust will buy a portfolio of 19 holdings from a venture capital fund already run by the Seraphim team, offering a targeted and concentrated portfolio. Yet as with many thematic ETFs there will still be some breadth: the team focuses on a relatively broadly defined theme of space tech and holdings range from Leolabs, which can track satellites and space debris, to airspace management name Altitude Angels, which focuses on the safe operation of drones.
The second difference is more striking. Seraphim targets early and growth-stage companies and will tend to hold unlisted names for now. HydrogenOne should also generally shy away from listed stocks, with an ambition to have 90 per cent of assets dedicated to unlisted companies and private projects. The trusts will therefore both be digging deep to find early opportunities in their respective industries.
This addresses some common problems of thematic investing but does create other issues. One criticism of thematic ETFs is that they buy into stocks that are already heavily hyped up, setting investors up for losses when they inevitably come down to earth, while another gripe centres on the idea that when ETFs do set up in time to capitalise on a trend, they are too early to find a sufficient number of listed companies that are related directly to the theme or liquid enough to be held in the fund. This may explain how, over in the US, Ark Invest’s space-focused ETF has held names such as Netflix. Using the investment trust structure to invest in private assets could solve both of these problems.
That said, going for earlier-stage companies and projects could invite a much higher level of risk. A portfolio of unlisted companies is also difficult to monitor: updates on progress can be rare and sporadic and the level of disclosure available to private investors can be significantly limited. As with other esoteric assets held in closed-ended funds, investors often have to hope that the judgement of the investment team ultimately wins the day. Thematic investing remains a risky pursuit.
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