Your IndustryOct 12 2015

Investment Trusts - October 2015

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Approx.50min

    Investment Trusts - October 2015

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      Introduction

      By Nyree Stewart
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      For some, the vehicle has been a mainstream asset class for some time, while others needed the RDR to push them into taking a second look at trusts. Almost three years since the new rules took effect, adviser take-up of the vehicles is starting to improve.

      But is this the start of a new trend, or simply a reaction to increased volatility in markets that is causing investors to diversify their portfolios more than before?

      The diversification argument has gained support by the increasing number of trust launches in alternative areas. Half of the eight new issues for the year to July 13 were in niche areas such as infrastructure, debt, property and private equity, according to the Association of Investment Companies.

      Tim Mitchell, head of investment trust sales at JPMorgan Asset Management, notes: “In terms of industry trends, new investment companies coming to market are providing access to alternative asset classes previously only available to large institutions.

      “The net asset value performance often has a low correlation to equity or fixed interest markets, and many pay high levels of predictable, quarterly dividend income.

      “Such innovation has been matched by a great deal of investment and development by many adviser and execution-only platforms that have helped to make investment companies easier and cheaper to trade – as well as hold – for the long term.”

      This improved access to investment trusts may partly explain the increased adviser interest, but the added benefits of the structure, such as gearing and using reserves to smooth dividend payments, means many have produced better performance than their open-ended counterparts.

      Research from Winterflood highlights the fact investment trusts have outperformed their open-ended peers in a number of areas, particularly in the Japan, Europe, the UK All Companies and UK Smaller Companies sectors.

      Neil Hermon, manager of the Henderson Smaller Companies investment trust, notes: “Many investors have been fixated on the slowdown in the Chinese economy, the knock-on impact on other emerging markets, and impending monetary tightening in the US. While keeping a watchful eye on macroeconomic concerns, we prefer to focus most of our time on identifying attractive investment opportunities created by these periods of market dislocation.”

      Of course, that’s not to say investment trusts are surefire winners. Like their open-ended peers, trusts focused on areas such as commodities and emerging markets have struggled with lower prices and regional volatility in the past 12 months.

      But in its latest quarterly review, Winterflood notes the investment trust sector outperformed broad indices in the third quarter of 2015 for the fifth consecutive quarter in spite of “varying market conditions”.

      It adds: “The sector has outperformed both in the difficult market conditions of the second half of last year and the volatile conditions of this year. This reflects a number of factors, including the sector’s increasing exposure to ‘alternative’ asset classes.

      “In the past 12 months the investment trust sector is up 1.9 per cent, compared with a fall of 2.3 per cent for the FTSE All-Share. In 2015, investment trusts have outperformed the broader market: down 1.1 per cent, compared with a total return decline of 2.9 per cent for the All-Share.”

      With the macroeconomic outlook still uncertain, diversification into different investment structures could be just as important as allocating between asset classes when looking for the best returns.

      Nyree Stewart is features editor at Investment Adviser

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