Investment Trusts

Investment trusts: outperforming in volatile conditions

May 2020

Peter Hewitt

Director, Portfolio Manager, Multi Asset Solutions

LEARN MORE ABOUT THE AUTHOR
Share
Subscribe to our Insights

Risk Disclaimer 

Capital is at risk. The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets.

Past performance should not be seen as an indication of future performance. Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Investment trusts have outperformed the UK market as the coronavirus pandemic wages on. That’s not to say that the sector hasn’t been turbulent, posting returns of around -19% for the first quarter before recovering in April, rising 9%. Meanwhile, trusts are trading on significantly wider discounts almost across the board. From January’s low of 1%, the average discount for the sector widened to nearer 6% at the end of February and peaked at 22% at end of March, before narrowing to around 10% currently. These are staggering jumps compared to years of barely any movement at all around the 5% mark.

Risk Disclaimer

Capital is at risk. The value of an investment is dependent on the supply and demand for the trust’s shares rather than its underlying assets. The value of the investment will not be the same as the value of the trust’s underlying assets.

 

These are sobering figures. But the fact remains that, overall, investment trusts are holding up better than the market: the FTSE All-Share index tumbled down 25% for the first quarter, before rising just shy of 5% in April.

 
Why? There are three key reasons at play.

Firstly, well over half of the sector’s assets are invested overseas, which have been boosted by sterling’s weakness against both the dollar and the euro.

Secondly, a huge chunk of the market cap of the sector is attributed to alternatives, which are largely unaffected by the direction of equity markets, such as core infrastructure, renewables and funds invested in care homes, social housing and even royalties income. Yes, these share prices have fallen – but their net asset values remain unaffected by equity market sentiment, so they’ve fared better than the market.

Thirdly, big global growth trusts with significant exposure technology and healthcare, as well as specialist trusts solely focused in these sectors, have typically proved resilient so far this year. This is thanks to the spotlight currently shining on the likes of Amazon, Microsoft and Netflix as people are forced to work, socialise and shop inside, while healthcare companies involved in fighting the virus are also performing well. Meanwhile, UK equity fund managers typically overweight small and medium-sized companies in order to perform have been hardest hit – although their strategy boasts good long-term performance, in times of stress, investors prefer the certainty of larger cap stocks.

 
So where to next?

Since Boris Johnson’s recent Sunday address to the British public, England is at the start of the road to social and economic normalisation, with each of the other UK nations to follow at the pace directed by their respective leader. However, let’s be clear that this road is a very long one, with much uncertainty along the way – so we cannot predict what, exactly, this recovery will look like. Nor can we guarantee that investment trusts will continue to outperform the market. However, at least from an income perspective there is hope. Unlike open-ended funds, investment trusts can store up to 15% of their income from holdings each year in revenue reserves. Some managers have built these reserves up to be able to keep on paying dividends to shareholders in difficult times such as these, regardless of what’s going on in the portfolio.

Past performance should not be seen as an indication of future performance. Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Subscribe to our Insights

Related articles

No posts matching your criteria