Investment trusts - The missing link in Singapore's capital markets

WITH the growing appeal of private equity (PE) worldwide, Singapore needs to capitalise on its strong business trust franchise to develop a cluster of listed investment trusts (LITs) - permanent capital vehicles found on the bourses of Sydney and London. This will enable greater access to PE opportunities by retail investors in Singapore's securities market, while also enhancing the city-state's asset management sector.

Investment trusts are publicly traded, closed-ended vehicles run by an investment team and portfolio manager that invest across a range of asset classes and strategies. Shares in a trust can trade at a premium or discount to the book value of underlying assets, with no capital actually withdrawn from the trust.

Unlike open-ended funds, trusts can hold on to profits from good years and draw on capital to smooth out dividend payments in lean times. This makes it a compelling structure for holding illiquid assets (eg private equity) and long-term investing. By comparison, open-ended funds such as exchange-traded funds (ETFs) often contract in volatile or distressed markets as investors seek redemptions. This can create scenarios where investment managers are forced to sell parts of the portfolio into a falling market, to provide liquidity for those investors who are redeeming their investment.