Which investment trusts should survive the market mayhem?

Look carefully at investment trusts’ recent performances to see if they’re fulfilling their mandate, says David Stevenson.

Market mayhem usually prompts investors to keep a much closer eye than usual on the performance of their funds. This can be frightening if markets go into freefall, but it is useful to assess whether funds based on a certain investment strategy behaved as expected. 

Did the funds deliver on their promise? During the latest correction (my performance figures were calculated on Monday evening) the huge range of investment trusts behaved as you’d expect, but with some interesting wrinkles. 

Diversified global equities funds have had a bad few weeks. The sector lost 11% in a month and 8% year-to-date. The FTSE All-Share is down 19% in a month. Miraculously, given its growth-stock focus, Scottish Mortgage seems to have suffered smaller losses than its main rivals Alliance Trust and Witan (which both have a more diversified approach to underlying styles of investing). Scottish slid by just 9% over four weeks; the others lost a respective 15% and 14%.

Genuinely defensive investment trusts

Crucially, most defensive equity funds did exactly as promised – they minimised losses. Credit to Personal Assets in particular which year-to-date has managed to turn in a positive return of 0.7% and lost only 2% over the last month. Ruffer Investment and Capital Gearing weren’t too far behind: down 0.6% and up 0.7% so far this year. 

I think all those still invested in absolute return funds in the unit trust sector – which have largely under-performed and not delivered what they promised – should decamp en masse to defensive investment trusts. 

Meanwhile, many alternative funds delivered real diversification benefits. Take core infrastructure funds such as HICL. This sector fell by just 4.8% over the last month and 1.4% year-to-date. Renewable funds have barely declined in four weeks. Debt funds are marginally down year-to-date, although the market jitters could mutate into some form of credit crisis, perhaps sparked by defaults in the US energy sector. 

When it comes to exchange-traded funds (ETFs), French bank Societe Generale (SocGen) spotted an interesting new trend as it explored fund flows in February. Investors in the main developed-world markets are dumping mainstream benchmark indices in favour of more thematic or sectoral products. Crucially, environmental, social and governance (ESG) investing is becoming more prevalent as a defensive strategy, an observation reinforced by plummeting energy stocks. SocGen noticed $7.3bn flowing out of US indices, $5.3bn from Japan, $3.6bn from emerging markets and $0.7bn from Europe. By contrast ESG ETFs collected $5.5bn in net new assets, slightly below the all-time high of $6.3bn recorded in January. So-called factor based funds (focused on value, growth, or low volatility, for instance) reported $3.7bn in net inflows. 

Asia proves resilient

It’s also interesting to note how different country-based markets have performed of late. According to index provider MSCI, in the last week of February when the global coronavirus panic kicked off in earnest, those in Asia and the greater China region fared best, including China, Hong Kong, Taiwan and Singapore, perhaps because the effect of the epidemic had already been priced in during its early stages. 

The MSCI Pacific index produced a total return in sterling terms of -5% that week, while its European counterpart fell almost twice as far. Norway (all that oil) and Germany were particularly badly hit during the scare; Finland, Israel and Denmark experienced much smaller declines. Emerging markets lost 6%, with indebted trouble-spots Greece and South Africa falling by 16% and 14% respectively.

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