After an extraordinary performance in 2020, investment trusts were bound to suffer something of a setback in 2021.
In 2020, the FTSE Equity Investments index rose 17.8% compared with a decline of 9.8% in the FTSE All Share index.
The resulting outperformance of 27.6% was the largest ever recorded.
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So it was always going to be a tough year to beat.
Overall, investment trusts have lagged in 2021 – but many sectors have still done well
Some of the investment trust sector’s 2020 strength reflected its overseas exposure (the MSCI All Countries World (ACW) index returned 12.7% in sterling) – but the UK, which accounts for 24% of the equity component of the sector (58%), and probably more of the alternative segment (42%), is still disproportionately important to investment trusts.
Also worth noting is that none of the performance reflected falling discounts which, on average, rose from 1% to 1.7%. (Find out more about discounts and how investment trusts work here.)
The sector’s bias to the “growth” style of investing clearly helped, with the giant of the sector, Scottish Mortgage, being one of three Baillie Gifford trusts to return over 100%.
But by late in the year, the performance gap between “growth” and “value” stocks had become extreme and value had already started to out-perform. This pointed to investment trusts lagging in 2021 – and so it proved.
In the first half of 2021, they rose 6.9% while both the All-share and the MSCI ACW index returned 11.1% (the UK market, at last, keeping up with global equities). Much of the under-performance was due to the average discount widening to 3.9%.
This was most notable in the growth trusts; for example, the shares of Polar Capital Technology Trust had traded at a premium to net asset value for most of 2020 but fell to a 10% discount despite an investment return of 10%.
Despite a widely-hailed return to value investing, growth funds continued to do well. The £20bn Scottish Mortgage Trust returned 18% in performance terms and 10% in share price while sister trust Baillie Gifford Growth returned 16%. However, the most positive aspect for the sector was that many trusts which had lagged in 2020 did well.
Helped by their allocations to private equity, both Caledonia and RIT returned 16%. Temple Bar, the disaster story of the pandemic melt-down, returned 17% under new management and Lowland reversed a disappointing few years with a 16% return.
UK mid and small caps had an outstanding year, led by the laggard of previous years, Aberforth, which returned 30%. On average, the UK mid-cap specialists returned 16%, small caps 21% and microcaps 27%, though share prices didn’t always keep up.
Increased confidence in the UK’s outlook was most clearly visible in the property sector where valuations were barely changed, as they had been in 2020, but discounts to net asset value fell sharply, even for hard-hit areas such as offices, student accommodation and leisure.
Share prices also out-paced valuation uplifts in the private equity sector, of which investors had also been sceptical about the long term prospects.
There were, though, areas of disappointment. Despite healthy prospects, rising profits and improving corporate governance, the Japanese market responded with negative returns. Japan, it seems, performs best when it is forgotten, not when its advocates are most confident.
The renewable energy sector also had a disappointing six months; investors, quite rightly, are wary of the embrace of the political, media and social establishment not least because an avalanche of investment would reduce electricity prices and investment returns.
This malaise did not affect Impax Environmental, up 13%, which targets innovative companies across a broad range of environmental areas. The new economy has also benefited a very old economy sector, mining, through rising demand for metals. BlackRock World Mining returned 15% in the half year, though performance has faded recently.
Polar Capital Global Financials, which survived a continuation vote by the skin of its teeth in 2020, justified its survival by returning 15% (19% in share price terms). This enabled it to raise new equity, showing that, while investors continue to chase growth at almost any price, they are no longer turning their backs on the solid value offered by banks and insurance companies.
It has been a generally good year for investment trust governance
The health of the investment trust sector is shown not just by steady, broadly-based performance but also by continued issuance and good corporate governance. A record £6.7bn of new capital was raised in the first half, more than double the £3bn raised in the first half of 2020.
£4.7bn of the total was for “alternative assets” but not all this was in the high-yield areas such as infrastructure, property and renewable energy; £1bn was raised for private equity. Most of the £2bn raised from equity funds was for those with minimal or no yield.
£1.1bn was raised for five new issues, all in the alternatives space. The best performing of these, ship owner Taylor Maritime, has since returned 18% and is already raising additional equity. The fact that three flotations failed to get off the ground shows that investors remain choosy about new offerings.
The health of the sector is also marked by the readiness of directors to respond to poor performance or widening discounts. £2.2bn was returned to investors in the first half, £640m of which came from the take-over of Pollen Street Secured Lending.
Share buy-backs, according to Numis, totalled £1.1bn, of which £410m was from Scottish Mortgage. The remaining £500m came from tender offers and wind-down strategies.
Changes of management companies have worked well in recent years so it is no surprise that, following a long period of poor performance, the board of the self-managed Scottish Investment Trust has invited proposals from other groups. The manager’s enthusiasm for gold miners (the three largest holdings) cannot have inspired confidence in his “value” strategy.
More of a surprise was the decision of the board of Genesis Emerging Markets to move the management contract to Fidelity; performance has kept up with the benchmark index in recent years but not with its main competitors, JP Morgan and Templeton.
The boot was on the other foot when hedge fund manager Brevan Howard told the boards of its two trusts, Macro and Global, that it was doubling the fees it charged for access to its core funds to 2% per annum and adding a hefty performance fee. The two trusts had shrunk considerably over the years thanks to dull performance but its bets paid off handsomely in the pandemic melt-down. A merger of the two trusts, which have combined net assets of around £1bn, looks likely.
Brevan Howard’s disdain for the little people of the investment world (you and me) is highly unusual. The little people, whether as direct investors or via financial advisers and wealth managers, have turned the investment trust sector from a lame duck to the best-performing and fastest-growing investment vehicle in the market.
Stockmarkets look fully priced and uncertainties abound – but managers are full of enthusiasm about the long-term prospects. The steady performance of the first half after the break-through year of 2020 should tell investors that their money is in good hands.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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