The investment trust sector has not been immune to this year’s market volatility as it underperformed in the first quarter of 2016 amid a weakening of demand.
The FTSE Equity Investment Instruments Index was down 2.2 per cent in the three months to the end of March on a total return basis, compared with a decline of just 0.4 per cent for the FTSE All Share, a review of the sector by Winterflood Investment Trusts shows.
In contrast, in 2015 the investment trust sector was up 5.2 per cent compared with 1 per cent for the FTSE All Share, marking the third year of outperformance in the last four, Winterflood says.
The review says: “The investment trust sector was hit nearly as hard as the main market by the severe downturns in the last quarter, when the All Share was down over 11 per cent at one stage.
“However, the trust sector failed to fully participate in the subsequent rallies and it was at this stage that discounts began to widen. We believe that this reflects a weakening in retail demand, which corresponds to the pattern shown in the Investment Association data of net retail sales of open-ended funds for the first two months of this year.”
Association of Investment Companies chief executive Ian Sayers says it has clearly been “a challenging first quarter” and it is no great surprise to see that investment trusts had “a bumpier ride”.
In March, Woodford Patient Capital Trust said it was suspending its fundraising, announced in January, amid continued uncertainty and lower liquidity in markets.
However Sayers says: “While over the long-term, as well as in positive markets, investment companies tend to outperform, in part due to the amplifying effects of gearing, in a falling markets they can underperform – again due to the magnifying effects of gearing.
“Not all investment companies gear, and the average gearing currently stands at a relatively modest 7 per cent – but it will have an impact nevertheless. Even so, investment companies are for the long-term and whilst interesting, not much can be read into one quarter’s figures.”
Discounts have also widened over the period, making it more likely investors will get depressed returns.
The sector average discount, excluding private equity, hedge funds and property funds, at the end of March was 8 per cent, compared with 4.8 per cent at the end of last year.
Sayers says: “This is the widest it has been since June 2013, but given the volatile start to the year this is again not hugely surprising, since investment companies are effected by market sentiment as well as the performance of their underlying assets.
“However, discounts are still, on average, well into single digits levels and still within the historical range of the last few years.”