Investment Trusts

Investment trusts: what happened last year and what’s to come?

Amid significant suffering in the UK equity market last year, the investment trust subsector proved extremely resilient.
February 2021

Peter Hewitt

Director, Portfolio Manager, Multi Asset Solutions

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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.

The FTSE UK All-Share Index lost nearly 10% last year as the pandemic disrupted and destroyed normality. But the UK investment company subsector within the index proved extremely resilient, up 17.8% over the year. What drove this massive outperformance?

Well the subsector has a 12% exposure to the Baillie Gifford Scottish Mortgage Trust (currently #29 on the FTSE 100), which rose more than 100%. This stellar performance was largely driven by two holdings: Tesla, which was up over 700%, and Amazon, which isn’t difficult to imagine why that holding performed well. In fact, by the time I have finished writing this article, there may well be numerous deliveries to my door!

More generally, investment companies exposed to tech, healthcare and growth stocks did very well in 2020. Meanwhile, with no big tech companies listed in the UK, the All-Share index suffered. Instead, the stocks that dominate the UK Index – oil, banks and retail stocks – were battered during the pandemic. This did also happen in the US to an extent, but these indices remained relatively strong thanks to the large tech companies prevalent there that have proven their worth over the past year. Big trusts with big exposure to tech and the US and less so to the UK were the strongest performers last year. Elsewhere, property trusts suffered, UK trusts were poor and trusts invested in alternatives were steady, usually exhibiting flat or very mildly positive performance.

 

All this changed in November

Not because of the US election – but because of the vaccine. On 9 November, Pfizer/BioNTech published efficacy results of 90+% for their potential Covid-19 vaccine. Moderna followed on the 16th, and the Oxford/AstraZeneca vaccine on the 23rd. These results changed everything, and the UK market rose 13% in November.

 

Looking ahead this year

Along with many market forecasters, I hope that the news and ongoing rollout of effective vaccines will help economies to move towards normalisation by the second half of this new calendar year. Meanwhile, huge monetary and fiscal stimulus from governments and central banks around the world should help this recovery to be robust.

Turning specifically to UK equities, they have persistently underperformed relative to most other major markets since the Brexit referendum back in 2016. This has left the UK market very attractively valued – and with a Brexit deal finally reached, we could finally see a cyclical rebound over this year. UK equity trusts with a small/mid cap bias would be poised to do well in this scenario.

This all depends on the virus though. If lockdowns continue further into this year than expected, this would cancel the domestic recovery I am hoping for. But if by Spring we receive better news and industries such as travel, leisure and retail begin to reopen their doors, a consumer boom may well fuel a recovery in the domestic names that have underperformed for so long.

Sources: Market data obtained from Bloomberg and BMO Global Asset Management, as at January 2021.

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.

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