The number of investment trusts in the 2015 Investment Adviser 100 Club has remained steady at 19, with the products making a strong showing in traditional equity categories.
But whereas in 2014 trusts were concentrated in the Property and Specialist Sectors and Assets categories, securing three of the five places in each, this year the representation is more mainstream.
As a result the Specialist sector has just two trusts in the healthcare/biotech and private equity categories, while Property has just one member – the F&C UK Real Estate Investments trust making its first appearance in the club.
The European Equity and UK Smaller Companies categories contain the most trusts at three apiece, while Asia Pacific Equity, Japanese Equity, UK Equity Income and Global Equity each have two trust members.
Although the overall number of trusts remains the same, only four have returned from 2014 – Invesco Asia Trust, Baillie Gifford Japan Trust, Schroder Japan Growth and Scottish Mortgage Investment Trust.
A further four have appeared in the list before, with the Jupiter European Opportunities Trust making it into the 2013 100 Club before falling away last year. In addition, the JPMorgan Emerging Markets Investment Trust, the Finsbury Growth and Income Trust and The Biotech Growth Trust were all included in both the 2012 and 2013 clubs.
So what has driven the surge of trusts in the main equity categories?
Association of Investment Companies spokesperson Jemma Jackson notes: “The past five years have been good for equities, and trusts tend to perform strongly in the longer term during rising markets. Gearing has clearly contributed to the performance, although with the average borrowing for the sector currently at a relatively modest 6 per cent, there are other factors at play too.”
Commentators also point to the closed-ended structure of investment trusts that is sometimes overlooked by investors.
QuotedData research director James Carthew says: “As a general rule we think trusts have a big advantage over open-ended funds in that their structure allows managers to take a longer-term view, holding investments that an open-ended manager might worry were too illiquid.
“The structure also negates the need to hold cash to fund potential redemptions and allows managers to borrow usually modest amounts of money to enhance returns. Of course, the borrowing – or gearing – can work both ways and so it is most beneficial in rising markets.”
Ben Willis, investment manager and head of research at Whitechurch Securities, agrees the combination of the closed-ended structure of trusts, the discount mechanism and their ability to gear mean they tend to outperform their open-ended counterparts when markets are rising.
He says: “What we have seen in some areas of the UK market – for example small and mid cap – is that [trusts] have produced double-digit returns in the past 12 months. Given this strong performance it is unsurprising to see the Aberforth Geared Income Trust and Invesco Perpetual UK Smaller Companies outperform as discounts will have narrowed.
“In some instances, the net asset value does not have to move that much to provide a return as long as the discount is narrowing. Any gearing by the trusts will have accelerated returns in the period.”
Looking at a few specific funds, Mr Carthew notes that Frostrow Capital’s Pacific Assets Trust “has had a great run”. He says: “Its focus on sustainable investing is paying off for investors and it is now the best-performing Asian investment company across most time periods.
“Meanwhile, three of the five European equity funds in the 100 Club are investment trusts. The ability to take long-term views is paying off here, but this has also historically been a very competitive part of the investment company market. Life in this market is also a lot more brutal.
“Unpopular funds are wound up or merged and underperforming managers get replaced by boards. We believe European funds have been whittled down.”
Mr Willis adds that from a valuation perspective the European Equity sector had been looking attractive versus other markets, particularly the US. But he suggests the negative macroeconomic situation and investor sentiment had held markets back until recently.
He explains: “The European Central Bank announcing quantitative easing provided the support that encouraged investors back in. As per the UK trusts, positive sentiment leads to an increase in investor demand and narrowing discounts/rising share prices and any gearing helps a decent trust outperform its open-ended equivalent.”
Nyree Stewart is features editor at Investment Adviser
The AIC view
The AIC’s Jemma Jackson explains some of the factors driving trust trends in the 2015 Investment Adviser 100 Club:
“It’s good to see investment trusts featuring so prominently, both in comparable retail-focused and more specialist sectors, and it emphasises why trusts should not be overlooked for client portfolios.
Let’s not forget that discounts have narrowed considerably; although again it’s not always something to overplay in every case. For example, average discounts in the biotech and healthcare sector are similar to where they were five years ago, in spite of the spectacular run of performance. And while the UK Equity Income investment trust sector has fallen from trading close to par to a modest discount of nearly 2 per cent, it continues to feature in the 100 Club.
Likewise, the UK Smaller Companies sector remains on a double-digit discount in spite of its strong performance, which has also seen it dominating the 100 Club – albeit it has come in from a 15 per cent discount five years ago to 10 per cent.
Ultimately, it’s not down to one factor, but the impact of a range of different features.”
