A successful first half for fans of investment trusts

For global equity markets the first half of 2018 was a case of two steps forward, two steps back. The FTSE All-Share index bounced back from a 10% drop in the first quarter to finish the half year down just 0.5% (including dividends). The FTSE World index gained 1%, helped by the drop in sterling and the outperformance of American stocks.

Investment trusts performed better, with the FTSE Equity Investment Instruments index returning 2.8%. Since 55% of this index is made up of equity funds and 45% comprises other asset types whose performance has generally lagged, an equity investor with a few of the better-performing funds could easily have racked up a return of 5% between January and June. An annualised return of 10% when inflation is only 2.4% is more than satisfactory.

Most followers of MoneyWeek recommendations should be happy. In the global sector, returns averaged 3.6%, but Independent, Scottish Mortgage and Monks managed 21%, 18% and 10% respectively. Mid Wynd, Alliance, Witan and Scottish Investment Trust all produced marginally positive performances. Scottish Mortgage's performance is largely due to its high exposure to technology; in this sector, Polar Capital Technology Trust's return of 10% was trounced by Allianz Technology with 22%, while Herald, with a broader new-economy mandate but heavily focused on the UK, returned 15%.

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Among the more defensive global funds, RIT stands out with a return above 5%. In the international income sector, Henderson International has been disappointing with a return of -4.6% but at least we advised against Murray International, down 10%. Scottish American, a recent recommendation, was only down 1%. Another Baillie Gifford Trust, Edinburgh Worldwide, leads the global small-cap sector with a return of 17%, followed by North Atlantic Smaller Companies at 8%.

Among the UK specialists, Artemis Alpha has bounced back after a dismal five years with a 16% return, but the ever-reliable Finsbury Income & Growth, which achieved 4.8%, is a safer pick. Schroder Income Growth notched up 10% as the discount to net asset value narrowed: investors expect the performance to improve when the management moves to Baillie Gifford. Discount narrowing also explains the 7% return from Fidelity Special Situations. Aurora, a contrarian fund we recently recommended, gained 5.3%.

UK income funds have struggled but another contrarian fund, Alastair Mundy's Temple Bar, is ahead of the pack with a positive return. Mark Barnett's Perpetual Income & Growth gets the wooden spoon with a return of 6% stay away. The performance of his former colleague, Neil Woodford, was rescued by a 13% jump in June, but his Patient Capital Trust fund was still down 1.7% overall. The jump was due to the listing of Autolus, but a larger stake is held by Syncona, a trust that rose 25% in the first half. The healthcare sector appears to be gaining momentum. BB Healthcare, launched in December 2016, gained 10% and sector veteran Worldwide Healthcare 5%.

In the UK small-cap sector, BlackRock Smaller Companies has been the star performer, returning 18%, closely followed by its sister fund, Throgmorton. In the micro-cap sector, the performance of Downing Strategic has been disappointing owing to bad news on a significant early investment, but patience should pay off. River & Mercantile's UK Micro Cap Trust suffered from the abrupt departure of manager Philip Rodrigs, but the underlying performance (+8%) has been nearly as strong as at Miton UK MicroCap.

Alex Darwall's pessimistic take on the macroeconomic backdrop has paid off handsomely with a 9% return from Jupiter European, while most competitors posted negative returns. The star performer in the North America sector has been Baillie Gifford US Growth, a new issue during the half year, but already up more than 20%. Jupiter US Smaller companies returned 15%. Most of the Japanese specialists outperformed their index but both JP Morgan Japanese and Fidelity Japan (+6.7%) were ahead of the sector leader over the longer term, Baillie Gifford Japan (+2.7%). Its sister small-cap fund Shin Nippon returned 9%.

Asian markets have been hampered by the strength of the dollar. Few produced a positive return but another Baillie Gifford Trust, Pacific Horizon, gained 14%. Fidelity China Special Situation's return of 2.5% is also noteworthy with its avoidance of poorly performing state-owned enterprises vindicated. Emerging markets look due a rebound, however, with political risk surely priced in by now and bullish sentiment on the dollar exaggerated. If so, BlackRock Frontiers, 8% in the half-year, looks attractive. The more cautious may prefer the Genesis, Templeton, JP Morgan or, for those looking for income the Utilico emerging-markets trusts. All are on double-digit discounts.