Investing Comment |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Solid performers reap rewards By Sonia Speedy
While market turmoil has spilled over from the US subprime mortgage market in recent months, UK investment trusts have been holding their own, according to experts. The latest turmoil is yet another obstacle on the road to profit. However, investment Strong performer "By and large, investment trusts tend to outperform unit trusts," says Jim Tennant, head of investment trusts at Gartmore. "This is mainly because they can gear. Over the long-term, markets go up, so if you're geared at the right time through that period, you should be able to get higher performance," he says. A glance at a comparison of unit trust and investment trust performance confirms this. A £100 lump sum invested in the average investment trust or closed-ended investment company returned £193 over the three years to the end of July, compared with the average unit trust's £151. Over a longer period, the gap widens further. Over 10 years, the average investment trust returns £246 on that £100 investment, compared with the unit trust's £183. Challenging times Investment trusts, like other asset classes, have had mixed fortunes in terms of performance over the last decade, however. In the build-up to 2000, the sector enjoyed strong investor appetite, whetted by the technology boom. But when these heady days ended, investment trusts felt the effects of the financial downturn. This was felt most keenly in the split capital arena, culminating in the split capital mis-selling debacle that peaked in 2002 and tainted the investment trust industry as a whole. There has been more positive growth in the investment trust world in recent years, helping demonstrate the merits of this asset class. Gavin Haynes, managing director of independent financial adviser Whitechurch Securities, says that five years ago investors had lost faith in stockmarkets, and discounts in investment trusts were particularly wide. Since then, those gaps have narrowed overall. Long-term investors reap rewards Jeremy Tigue, fund manager of the Foreign & Colonial (F&C) Investment Trust, points out that, despite the ups and downs, most of those investing for the long-term would have made money over the last decade. "Even taking into account the severe bear market we endured from 2000 to 2003 - the worst for 30 years - most investors in investment trusts would still have made money over the last 10 years," he says. "They wouldn't have done in Japan and in a few technology funds, but apart from that, broad spreads of investments - in Europe, small companies, large companies, mining, resources and utility funds, for example - would all have done very well over that period." Figures from the Association of Investment Companies reflect the rising popularity of investment trusts. In December 2000, there were 358 investment companies with total assets of £78.8 billion. The ensuing downturn saw this drop to £47.7 billion by the end of 2002, although by then there were 363 investment companies. The sector then began to grow again, and this year the industry's assets hit their highest level ever, reaching nearly £100 billion. At the end of July the UK investment trust sector was worth £95 billion, and 316 investment trusts were in place. The average discount has fluctuated over the years. It averaged 12.3% at the end of 1997 and 12.7% at the end of 2002. It sat at 7.3% at the end of August this year. Gearing increases positivity "Markets picked up in 2003, and the bull market effectively restarted," says Richard Wallis, deputy head of research and investment at IFA Origen. "Since that point there are areas that have done very, very well and the gearing has just exaggerated that situation." Wallis says performance in specialist areas has been particularly strong in recent years, while some of the older and more traditional investment trusts, such as the F&C Investment Trust, have lagged. "Some of the returns are still pretty good, but compared with their respective sector averages, they've plodded," he says. Similarly, Craig Wetton, investment director at IFA firm Chartwell, suggests some "core" investment trusts are sitting at quite large discounts. However, he says many of these larger core trusts have taken a "long, hard look" at how they are managed and started making greater use of mechanisms such as share buy-back to help keep discount levels under control. Some have also revamped their investment style, moving to segregate investment mandates in a bid to boost performance. The Witan Investment Trust, for example, has moved to bring in sub-managers for specific areas, such as a UK manager for UK investments and a European specialist. These changes are beginning to be reflected in investment trust performance, but some discount levels are still wide, despite managers' best efforts, Wetton says. The ones to watch Wallis points out that some of the more specialist - and often higher risk - investment trust sectors have been recording strong performance in the short term, thanks to the use of gearing. A look at the performance tables confirms this. The Merrill Lynch World Mining investment trust company, for example, saw returns of £310.94 over the three years to the end of August on a lump sum investment of £100. Over 10 years, this return was a healthy £760.66. On the same basis, the Pacific Horizon investment trust - winner of the Asia Pacific excluding Japan sector in this year's Moneywise Investment Trust awards - saw returns of £277.63, or £421.63 over 10 years. For more generalist funds, such as those in the global growth sector, Jupiter Primadona Growth topped the charts over the three years to the end of August, at £231.15 on a £100 investment, bringing in £245.84 over 10 years. The Investment Companies Review from investment bank Dresdner Kleinwort states that, in the first half of this year, sectors such as mining, emerging markets and European small caps were delivering strong returns. However, Japan, pharmaceuticals and technology were continuing to disappoint. Gartmore's Jim Tennant believes income funds, emerging markets and Europe all look well-placed at the moment, although caution is needed with emerging markets, depending on how far the "infection" from the US subprime mortgage market fallout spreads. Investment trust managers to watch out for, according to Warren Perry, head of research at IFA firm Churchill Investments, include Karen Robertson of the Standard Life Equity Income trust and Sonja Schemmann of the Schroder Income Growth Fund. He believes both are up and coming, with Schemmann, for example, already widely considered to be one of the top young German managers. Subprime survivor The ripples emanating from the collapse of the US subprime mortgage market are likely to make investors more cautious. However, the experts say it has not impacted significantly on the investment trust sector to date. Gavin Haynes says the effect on performance varies, depending on the particular underlying trust and where it is invested. "Certainly global markets generally have had a correction, but investment trusts have held up reasonably well. You didn't see huge underperformance due to widened discounts or gearing," he says. Job Curtis, director of the value and income team at Henderson Global Investors, agrees. "When we had the real correction in the market in July and August, investment trust shares actually didn't do as badly as the underlying assets, so the discounts at that point actually came in," he says. However, Curtis says discounts did rise across the sector in May and June, but he is still relatively upbeat about the current market situation. "I think that now you can find good quality trusts on a good discount. There's a bit of fear around and that's often a good climate to invest in," he says. Tennant adds that in July and August property investment trusts saw a sharp correction, something AIC figures confirm. Property was the fastest-growing investment company sector over the last five years. The total returns for the average company in this sector were £158.15 on a £100 investment over the last three years to the end of July. However, the sector has recently seen average discounts swell to 7.5% from 1% a year ago. Invesco Perpetual specialist funds distribution director Andrew Watkins attributes this to a "reverting to the mean", following several years of "supranormal gains" in property markets.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Send Article by Email