Investment trusts have long been under pressure from the open-ended fund market, which is often easier to access and offers the scale and liquidity the professional investment community increasingly requires.
More recently, trusts have also faced the threat of competition from the $10trn passive industry, which only continues to grow.
In response, a closed-ended fund must look to its unique characteristics and use them to its advantage.
The structure allows investment managers to take longer-term views, employ more concentrated, high conviction strategies, use leverage and to invest more readily in alternative or illiquid assets.
If a closed-ended fund is not exploiting these characteristics to offer a differentiated investment proposition, does it deserve to exist?
Point of difference
Many investors remain attracted to closed-ended, active investment strategies with a genuine unique feature.
Of course, an illustrious history of sustained outperformance helps, but one should not underestimate investors' willingness to support new ideas if the strategy is well marketed and offers something different to passive or open-ended alternatives.
That point of difference can take many forms. The £116m Aurora Investment trust uses the structure for its highly concentrated UK value strategy, which typically holds only ten to 20 companies, while the £98m Augmentum Fintech trust uses it to offer exposure to unlisted fintech opportunities in a sector ripe for disruption.
Meanwhile, the recently launched £105m Mobius Investment Trust aims for c.100% active share through a concentrated, small- and mid-cap focused, emerging markets strategy.
Using the relative protection from redemptions afforded by the closed-ended structure, the team have been able to target more illiquid opportunities with an average market capitalisation of around $2bn.
Not one of its initial 15 holdings appears in either the MSCI EM or MSCI EM Mid-Cap indices.
The team also aims to improve the market ratings of its holdings by engaging with management on an ESG basis.
This takes time so is better suited to a closed-ended structure, where underlying companies do not have to be sold before they have reached their full potential.
Threat of the 'mega-chains'
Another challenge the closed-ended sector faces is the consolidation of the wealth management sector, which has accelerated in recent years.
In August, Rathbones completed its acquisition of Speirs & Jeffrey, creating a £44bn wealth management group and cementing its position among the small coterie of 'mega-chains'.
This ongoing drive to create economies of scale has consequences for the way in which these mega-chains invest: as they grow and centralise investment processes they require more scale, more liquidity and greater central oversight.
For these mega-chains, investment selection appears to be viewed increasingly through the prism of size and liquidity.
Given that over half of all UK-listed investment trusts have less than £250m assets under management, this renders many off-limits. Unless the strategy is liquidity constrained or doing something truly different, then it must also look to grow in order to meet the demand for scale.