The phrase “global growth” looks like something of a misnomer as investment trusts in the sector of the same name lost, on average, 33.04% of their value over the 12 months to March 10, according to Financial Express.
The F&C Investment Trust and Witan Investment Trust both released annual results last week showing that their net asset values (NAV) per share declined by about a quarter during 2008.
Gerald Smith, the manager of Baillie Gifford’s Monks investment trust, acknowledges “uncharted territory” for the global investment company behemoths. After past banking sector collapses, he says: “most recoveries have come about through [a country’s] currency depreciation and the export sector – but that’s quite difficult if everybody’s in the same boat. You can’t export to the moon.”
However, the peer group performed less badly than the UK Growth, Europe and North America sectors. Most trusts, thanks to their capacity to keep income in reserve, continued to increase dividends.
Both F&C and Witan said moves away from sterling-denominated assets had mitigated the effects of stockmarket falls. “There was a huge fall in sterling against the dollar in particular and other currencies as well. We benefited from that devaluation,” says Jeremy Tigue, the manager of the F&C trust.
Witan says it too benefited from currency movements, enabling it to outperform its benchmark. Yet Witan’s active currency management through Mellon Capital was, the company admits, “very disappointing” – begging the question whether gains from sterling’s fall were a lucky accident.
Tom Tuite-Dalton, a researcher at Oriel Securities, says the currency gains “show that global diversification actually does make sense”. He highlights that moves away from British equities form part of the long story espoused by most global trust managers – that emerging markets are set to triumph over the developed world.
Without the pressures of redemptions, and with institutional and trust fund investors working on long investment horizons, global trusts argue they are free to pursue this long-term view.
Still, as trusts await the new world order, they face an uncertain 2009. Winners in the past year have included the Personal Assets Trust, whose late manager, Ian Rushbrook, predicted the credit crunch, and Alliance Trust, which was almost as defensively positioned. They lost 14.8% and 22.1% over the 12 months to March 10 respectively, according to Financial Express.
F&C was a high-profile casualty of gearing during the year: Tigue admits, “We were much too optimistic.” In March 2008 he increased gearing in preparation for a stockmarket bounce; once bitten, he now has the trust 7% geared and does not anticipate taking on more debt until late this year.
However, the Edinburgh Worldwide trust maintains 34% gearing, according to the Association of Investment Companies (AIC). Anzelm Cydzik, the client liaison manager at Baillie Gifford – which runs the trust – said gearing will remain relatively high. “Our investment remit time horizon is five to 10 years. We believe that being geared into the equity market over that time is well worth it,” he says.
With the outlook still cautious, should trusts diversify further to spread risk? The question seems to expose divides over trusts’ direction.
Simon Elliott, the head of research at Wins Investment Trusts, says, “Some can do better without leverage – it’s diversification that is important for these global trusts.” Tigue says: “We’re very diversified with over 600 holdings: that means less specific risk.”
However, Elliott is sceptical of trusts’ ventures into multi-asset investment, although the Alliance Trust and F&C Trust have added areas including private equity and property. “I don’t think it has enhanced performance,” says Elliott.
Simon White, the head of investment trusts at RCM, likewise says, “Some of the gloss of modern portfolio theory and uncorrelated asset pools creating superior risk-adjusted returns has gone.”
Smith is content with Monks’ holdings of about 130 stocks: “As long as there’s reasonable liquidity in the stock there’s no reason to have a huge number of holdings,” he says.
Alliance Trust, after its relative success in 2008, says it aims to reduce its holdings. “We are committed to a high-conviction approach …currently have just over 200 equity holdings, and have instigated a programme to reduce this number still further,” says George Renouf, the trust’s director of investment strategy.