Investments 

Trusts show mettle in less liquid assets

This article is part of
Investment Trusts - June 2015

The closed-ended structure of investment trusts means historically they have offered outperformance in alternative asset classes such as infrastructure and debt.

The biotechnology and healthcare sector has produced “particularly strong returns”, according to the Association of Investment Companies (AIC), and is the top-performing investment trust sector over one, three, five and 10 years.

Mona Shah, research analyst at Rathbones, suggests: “Investment trusts tend not to suffer the daily inflows and outflows of open-ended funds. This means the manager is less distracted and can focus on alpha-generation. Consequently, many investment trusts outperform their open-ended equivalent strategies.”

She confirms that the fixed pool of capital for investment trusts means they also lend themselves to more illiquid asset classes “that investors might otherwise struggle to get access to in a daily dealing open-ended fund”, citing private equity and certain areas of the property market as examples.

In the Sector Specialist: Biotechnology and Healthcare sector, SV Life Sciences’ International Biotechnology Trust was the top performer in the 12 months to May 20, with an impressive 100.09 per cent return. Frostrow Capital’s Biotech Growth Trust also generated a very decent return of 80.32 per cent over the past year, FE Analytics shows.

Tim Mitchell, head of investment trust sales at JPMorgan Asset Management, notes: “There remains high demand for alternative asset classes – property is one area performing well. Anything with a low correlation to equity markets but with yields in excess of the traditional fixed income markets is increasingly desired by asset managers looking to diversify risk away from the traditional balanced mandate.”

Data from the AIC also point to decent returns from the Asia Pacific region. The Country Specialists: Asia Pacific and Asia Pacific excluding Japan sectors are the second- and third-best performing investment trust sectors respectively over 10 years.

Shorter-term performance data reveal Japan and Japanese smaller companies sectors have also performed well.

Ms Shah confirms: “We are particularly positive on Japan – it looks relatively attractive from a valuation perspective and increasingly positive newsflow on corporate governance. For example, the new Tokyo Stock Exchange rules require all firms that do not have at least two outside directors to tell shareholders why this is the case.”

In the year to May 20, Aberdeen Japan Investment Trust returned 58.40 per cent, placing it top in the IT Japan Equities sector; the average return in the sector was 47.14 per cent.

Ms Shah says: “European investment trusts have performed well over the past 12 months, even before the announcement of quantitative easing in Europe, and are on low single-digit discounts or even premiums. We do not foresee more discount narrowing in Europe.”

Mr Mitchell has also seen strong performance data coming out of Europe and Japan investment trusts more recently, noting “impactful policy changes” in Japan in particular.

“Developed market equities have performed particularly well over the past 12 months. The impact of quantitative easing and the low interest rates that persist, coupled with the low oil price, have driven asset prices higher,” he observes.

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