Sector focus: Investment trusts hold up against volatile markets

Last year was not an easy year one for investors. After a good start, confidence ebbed away as concerns emerged about the strength of the Chinese economy. It wasn’t all doom and gloom by any means, but making positive returns was not as straightforward as the previous year.

Against such a background, investment trusts might have been expected to disappoint. In reality, they held up well against difficult trading conditions, though with so many sectors covered by closed ended vehicles, a wide variety of performances were recorded. In 2015 as a whole, investors might have achieved a return of more than two-thirds or lost more than 90 per cent of their capital, according to the statistics provided by the AIC on data collated by Morningstar.

Both the best and worst performing funds were in the property sector: Yatra Capital concentrating on the Asia Pacific region took top spot and the unfortunate Alpha Pyrenees Trust, which recorded a loss of 94.6 per cent, focuses on Europe. Only two other trusts would have lost investors more than half their money over the year and both are in the Commodities and Natural Resources sector.

But the performance of more mainstream trusts is encouraging. Looking at the final quarter, brokers Winterflood point to an outperformance overall against open ended instruments. In part, this is a consequence of the tightening of discounts, following the selloff that accompanied the reaction to turmoil in Chinese markets, but the change was actually quite small – the average discount fell to 4.6 per cent at the year end, compared with 5.1 per cent at the end of September – a measure of how successful this industry has been in controlling discounts.

It is clear that 2015 was the year for smaller company managers. The European and Japanese Smaller Company sectors led the field, rising by an average of a third and 31 per cent respectively, while UK Smaller Companies came a creditable fourth, up nearly a quarter. Japan and UK All Companies filled the third and fifth slots, the latter proving an unexpected winner, given the prevailing conditions. Commodities and Natural Resources came in an unsurprising last, with the average trust losing nearly a quarter in value.

Longer-term, we see Biotechnology and Healthcare riding high, topping the average performance tables over three, five and 10 years. This is, of course, a relatively small sector, but one on which Neil Woodford has chosen to place emphasis in his new operation.

More conventional sectors also do well. Over 10 years, following Biotechnology and Healthcare, the running order calculated by weighted average is UK Smaller Companies, European Smaller Companies, UK All Companies, Asia Pacific ex-Japan and North American Smaller Companies, with UK Equity Income not far behind.

As for individual trusts, Lindsell Train Global deserves a mention for consistent performance. The original vehicle for Nick Train and Mike Lindsell, who have gone on to make quite a reputation in managing closed ended funds, it is the second-best performing trust over 10 years and has a much wider investment brief than the leader, the very specialist Biotech Growth.

It is encouraging to note that there are plenty of well-known names among the best performing trusts. JP Morgan, one of the biggest managers of investment trusts, BlackRock, Standard Life and Baillie Gifford all feature at the top of the tables. And there are plenty of standard sectors available for choice, though it is worth remembering that closed ended vehicles are the best means of accessing more illiquid assets, such as property and private equity. Neither of these sectors feature well recently. Property – Asia Pacific, for example – delivered negative returns on average for 2015, despite the excellent performance of Yatra Capital.

Investment trusts remain an option that many advisers view with caution. With the ability to gear portfolios and the need to watch closely the relationship between the share price and the value of the underlying assets, careful research remains crucial. Despite widening options on platforms, these vehicles are not necessarily as accessible as open ended funds. The figures suggest they are capable of delivering superior returns, though.

Key Takeaway: Investment trusts have become a more popular option for advisers since the RDR, but do require more careful research and analysis. While the tables suggest some of the more esoteric areas, such as property, biotechnology and private equity, do well in a closed ended environment, it is clear that more usual investment sectors, such as smaller companies and global, have trusts present capable of delivering superior returns. With discount management systems now commonplace, investment trusts are a clear alternative to open- ended vehicles for many.