AIC’s Brodie Smith: Investment trusts can deliver in volatile markets

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We are all well aware that it has been a very bumpy start to the year for markets. The FTSE 100 finished last year at 6,242 and then it was a case of strapping on your safety belts as it hit turbulence and headed down to 5,537 on 11 February. At the time of writing, normal flight mode has resumed but after the past couple of weeks it is truly impossible to know what is going to happen next.

Since the financial crisis investment companies have had a particularly good period of performance, with strong markets and the need for income driving demand. It’s not surprising that an investment of £1,000 in the average investment company at the end of January 2008 would today be worth £2,384.

This was a great time to invest, although the FTSE 100 was still above 4,000 and had not reached the low of 3,512 on 3 March 2009. But how does it work out when you invest at a really inappropriate time?

If you had invested at the height of the economic boom, on 15 October 2007, the FTSE 100 reached 6,751.7 but then the credit crunch and associated bear market began.

A lump-sum investment of £1,000 in the average investment company at the end of September 2007 when markets were near their high would at the end of January 2016 be worth £1,530, a considerable eight years and four months later.

The same investment at the end of February 2009, near the March  low, would have been worth just £580, once again illustrating how important it is to take a long-term view.

How about lump sum versus regular saving over the same time period? AIC data suggests that even near the top of the market lump-sum investments outperform the equivalent amount fed into the market on a monthly basis over the long term, but the figures are close.

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The market is currently significantly down on its April 2015 high – of course it is impossible to know if this is a buying opportunity – but the data shows even investors in investment companies at the end of September 2007 when markets were high and then held on through the bear market are today up 53 per cent. For those of a more nervous disposition regular saving reduces the risk profile.

Of course no one knows where the market is heading but the analysts at Stifel have identified a number of companies they bel-ieve could offer value and merit further research. Looking at international investment companies, Stifel identifies JP Morgan Overseas, which has a high US weighting, where the discount has moved out to 11 per cent, bringing it close to the widest level for at least six months with a range of 12 per cent to 5 per cent.

Witan, the £1.7bn Global investment company, has fallen back from a 3 per cent premium recently and is now on a 4 per cent discount. Bankers, which has recently announced 49 years of successive dividend rises, has moved to a 8 per cent discount compared with a six-month range of a 4 per cent premium.

Looking at the UK specialists, Stifel states a number have de-rated with Dunedin Income Growth on a 11 per cent discount compared with a six-month low of 0 per cent, and Keystone, managed by Mark Barnett, is at a 8 per cent discount with a range of a 1 per cent premium.

Undoubtedly, it is interesting to look at the discount changes in these markets. However, it is important not to get too carried away: just because a company is on a wide discount does not mean it will necessarily narrow, boosting your returns. It is quite possible an investment company’s discount may remain wide. Clearly market timing is very difficult to get right but the market is currently significantly down on its April high.

The data demonstrates that long-term investors who put money into investment companies close to the market high prior to the credit crunch and then held on have today received positive returns.

Annabel Brodie Smith is communications director at the Association of Investment Companies