The value of an investment is dependent on the supply and demand for the shares of the Investment Trust rather than its underlying assets. The value of an investment will not be the same as the value of the Investment Trust’s underlying assets.
Potential wage inflation could exacerbate this, as many UK cities clamour for new employees to fill vacancy gaps left by the mass exodus from the hospitality sector during the first lockdown as many workers were forced to find alternative employment and have decided to remain away from hospitality. And it’s not just that sector: the other day as I took a walk around Leith – Edinburgh’s port area for those not familiar with it – I noticed a ‘bricklayers wanted’ sign on a building site – something I’ve not seen since the Canary Wharf building boom over a decade ago! The way to correct staff shortages is by increasing wages – and that’s what the market is fearing: the prospect of raised interest rates to accommodate higher wages and balance the economy.
So clearly there are some risks to consider – but let’s get back to UK market performance. So far this year, the UK market has been one of the best performers, with the FTSE All-Share up 11% to the end of May. Compare this with the S+P 500 rising 8%, the NASDAQ sitting at 2%, Japanese equities actually down 2%, emerging markets at 4% and the FAANG stocks flat! The UK market is relatively attractive currently, with its limited exposure (at least compared with the likes of the US) to tech or healthcare, which seem to have pulled back from their major highs in 2020. Instead, we’ve got two big oil companies and some miners (both out of favour but doing well), financials, retail and industrials – all of which are now performing well. Breaking down the UK market, both the FTSE 100 and the FTSE 250 have grown around 10% YTD…while small caps have increased 27%! All this suggests, then, that it’s a good time to be invested in the latter.
What does this mean for investment trusts?
Well the investment trust sector is currently only up 4% YTD because it’s heavily overseas-orientated, and the pound is currently strong against both the dollar and euro. Those trusts heavily invested in the heroes of last year – namely tech and healthcare – aren’t seeing as strong performance this year as economies are beginning to properly correct. Meanwhile, UK-focused trusts, specifically those with higher exposure to small and mid-sized companies rather than the FTSE 100, are doing well and leading the way – a trend I expect to continue over the coming months as life continues to return to normal. I am therefore focusing on these trusts and considering whether it’s time to take profits in growth/tech/health funds.
Sources: Market data obtained from Bloomberg and BMO Global Asset Management, as at 31 May 2021.