The number of investment trusts in the 2014 Investment Adviser 100 Club has declined compared to last year, although the products are still strongly represented.
In this year’s 100 Club, there are 19 investment trust members across nine of the 17 fund categories, excluding the investment group categories, down from 25 investment trust members in 2013. Witan Investment Trust is one of six investment trusts to appear on the list for a second consecutive year.
But the Association of Investment Companies (AIC) has hailed an “active” year for the investment company sector, highlighting new issue activity in particular. According to its latest figures, the average discount remains at a record low of 3.3 per cent, while overall industry assets hit £115bn at the end of June 2014 – an “all-time high” for the sector.
Ian Sayers, director general of the AIC, attributed the increased demand for investment companies to their long-term performance, the need for income and the implementation of the Retail Distribution Review.
Ben Yearsley, head of investment research at Charles Stanley Direct, believes the number of investment trusts in this year’s 100 Club is representative of the fact there are far fewer trusts in the UK than open-ended funds, which number approximately 2,000.
He points out: “In the year to May 2014, the FTSE returned just over 7 per cent, and in the year to May 2013 it returned more than 28 per cent. Therefore, due to the gearing in many trusts, it isn’t a surprise to know that more trusts featured in the previous year compared to the last year.
“In the long term, a manager doing both fund and trust would expect to deliver a higher performance from the trust due to gearing. In a flatter year, it is much more about the stock selection delivering outperformance. What is more of a surprise is the lack of representation in the main UK sectors.”
There are no investment trusts in the UK Equity category this year and only one investment trust in UK Equity Income. However, there are two smaller companies trusts in the UK Smaller Companies sector.
Last year, UK Equity Income was one of the categories with the most investment trust members, along with Global Equity, UK Smaller Companies and Specialist Sectors and Assets. This year, however, the specialist Japanese Equity and Property sectors have the most investment trust members, with three each.
It seems that investment trusts have recently outperformed in more specialist sectors, including private equity and technology.
Mr Yearsley agrees there are many more investment trusts in the 100 Club this year that are specialist in nature. Indeed, the list includes few he would consider “mainstream”.
“Over one-third of the trusts on the list are specialist – even more if you consider Japan or small cap specialist,” he says. “Investment trusts are very suited to some asset classes – often more illiquid ones, such as property and frontier markets – so it is not a surprise to see them heavily feature in these areas.”
He cites the competition in mainstream categories, such as equity income, and claims this makes outperformance by a wide margin that much more difficult.
Richard Troue, head of investment analysis at Hargreaves Lansdown, says investment trusts tend to outperform open-ended funds in a bull market, like the one we have seen over the past five years, because they can deploy gearing. He notes that discounts have narrowed to historically low levels, as evidenced in the AIC figures.
He points to some of the recent global trends that have prompted investment companies to outperform their open-ended counterparts. “We can see that over the year to date trusts with a focus on India have performed well, as sentiment has improved markedly following the election of [Narendra] Modi,” Mr Troue explains. “In contrast, smaller companies have struggled following a bout of profit-taking as investors switched out of investments that have performed well and into those that have lagged. Arguably, some smaller companies trusts are trading at attractive discounts relative to their recent history.”
Mr Troue points out that the “hunt for yield” in a low interest rate environment means trusts offering attractive yields have remained popular, with many close to their net asset value or at premiums.
Overall, the investment companies that have entered the 100 Club this year or retained their membership are those that have been able to achieve outperformance, often in some of the more specialist sectors.
Ellie Duncan is deputy features editor at Investment Adviser
