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Investment trusts – the market barometer

The investment company sector can be a useful means to gauge market sentiment, says Jemma Jackson, PR Manager, Association of Investment Companies

After a strong year for markets in 2013, the first 8 months of this year have been more ‘steady as she goes’ as far as performance is concerned. The investment company sector is up 2.7% over the year to date, ahead of the FTSE All-Share, which is up 1.3%. Many market commentators have expressed surprise, and in some quarters unease, that stock markets have so far apparently shrugged off the all too apparent geopolitical risks.

That said, the investment company sector can be a very useful market barometer in itself, thanks to the fact that it is so easy to gauge market sentiment by looking at discounts and premiums. It is interesting to see that whilst investment company discounts remain stable, and historically low, there has been some discount widening on a subsector level. Discounts have widened in the Smaller Companies, Technology and Private Equity sectors, which analysts at Winterflood put down to a market rotation away from cyclical sectors and mid/small companies towards more defensive sectors and large caps. So perhaps the market is becoming more mindful of perceived risk – possibly even throwing up some buying opportunities in the meantime.

Of course, there’s no telling whether or when the chickens will come home to roost for stock markets, although it’s worth remembering Warren Buffet’s wise words thus: “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

At the current point in time, investment company performance is holding up well both on a short-term and a long-term basis. Since the post RDR world was ushered in, Canaccord Genuity has been looking at the performance of comparable investment company and unit trust/OEIC sectors on a quarterly basis on behalf of the AIC (available on the adviser section of the AIC’s website). This is specifically for advisers to show how performance compares in different market conditions, through both the good times and the bad. The latest research to the end of June 2014 has just become available.

The Canaccord Genuity research demonstrates that investment companies are currently outperforming open-ended funds in most sectors. Over one and ten years, 12 out of 15 comparable investment company sectors are outperforming their open-ended cousins and over 5 years, investment companies are outperforming open-ended funds in 13 out of 15 comparable sectors. Investment companies have a tendency to outperform in rising markets due to the impact of gearing, discounts narrowing and the closed-ended structure which allows managers to take a long-term view of their portfolio. In falling markets you are likely to get a bumpier ride with an investment company, due to the impact of gearing and discounts widening. However, over the long-term, markets have risen and this has contributed to investment companies’ very strong long-term performance.

There’s no telling where markets may go from here, but the long-term case for investment trusts remains compelling. The AIC will be adding more online training sessions to the adviser section of the website in mid-September, with a series of regional seminars taking place around the country too. Do sign up to our monthly adviser newsletter ‘Spotlight’ on the AIC’s adviser website to keep up to date with the latest investment company news and our adviser training sessions.

Click here to go to the AIC website



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