One of the most important attributes of investment trusts is their closed-end structure. This enables managers to take a longer-term view, knowing that they will not have to sell holdings prematurely to meet redemptions, and invest in less liquid assets like smaller companies.
Investors are increasingly realising these benefits. Less liquid asset classes like infrastructure, growth capital, global smaller companies and property have attracted the most secondary fundraising so far this year, data from the Association of Investment Companies shows.
Assets in investment trusts hit an all-time high of £266 billion at the end of September. Of that, £8.65 billion was invested in 24 UK smaller companies trusts and £8.16 billion in five global smaller companies trusts. At a recent Sub35 webinar, wealth managers heard the views of managers from both subsectors.

Henderson Smaller Companies
Indriatti Van Hien, deputy manager of Henderson Smaller Companies, outlined why she regards investment trusts as ‘a powerful and attractive home for this asset class in particular’.
She runs the UK smaller companies trust alongside lead manager Neil Hermon and analyst Shivam Sedani. An unusual, and she says important, feature is that all three are chartered accountants.
‘You have to be a stock-picker in small cap land,’ she said. ‘There are hundreds of companies and management teams out there all with the next big idea and a fancy slide deck fighting for your capital.
‘And it’s our job to filter these ideas, kick the tyres on business models and have a solid understanding of working capital and capex [capital expenditure], then to form a view on what we think appropriate capital structures are.
‘Once we’ve done this, we need to make judgement calls on what valuation to pay to ensure enough upside and crucially, that there’s a decent margin of safety should business plans go off-road. And, believe me, in small cap land they really do.’

Edinburgh Worldwide
Luke Ward, deputy manager of global smaller companies trust Edinburgh Worldwide, rebuffs the short-termism that financial markets have suffered from since the 1980s.
‘It makes sense to be much longer term and much more positive about the world,’ he said. ‘The original purpose of the stock market was to contribute capital towards companies which are trying to create something of value for society and for savers to benefit from that over the long term.
‘If you focus on that, the factors which matter are human ingenuity, innovation, entrepreneurial flair – the kind of things that create longer-term value.’
The partnership structure of Baillie Gifford and lack of external shareholders enables Ward and his colleagues to take a longer-term approach to the task of finding ideas with a key focus on innovation.
‘These innovations don’t exist in a vacuum; they very much interact with each other. When you can apply things like cloud computing or the increase in processing power to things like gene sequencing and remote connectivity, the ability for small business to build audacious products is increasing.’

To hear more about the case for smaller company investing, both at home and overseas, and some of the companies the managers hold in their portfolios, watch the webinar.