Investment trusts weather the 2012 storm

It’s been a torrid time for private investors. With markets still volatile, one wouldn’t necessarily expect the investment company sector to be outperforming right now, given the magnifying effects of gearing (or borrowing), which can boost performance on the upside but also enhance losses on the way down.

So it was interesting to read investment company broker Winterflood's latest monthly update, which reports that the investment company sector was down 5.4 per cent in May compared to a 6.8 per cent fall in the FTSE All Share.

This also meant that the investment company sector has beaten this benchmark for four out of the last five months.

Of course a loss is still a loss, in relative terms or otherwise, but it is nevertheless encouraging that the average investment company is up 1.4 per cent over the year to date, compared to a 1.4 per cent fall in the FTSE All Share. 

The last five years of volatile markets have been less forgiving: the FTSE All Share has slightly outperformed the investment company sector, down 3 per ecnt compared to a 4 per cent decline in the average investment company.

But over 10 years, the advantages of the investment company structure come into their own: the FTSE All Share is up 58 per cent, lagging some way behind the average investment company, which on average is up 83 per cent over 10 years.

Given what a bumpy ride investors have had over the last 10 years, it is pleasing that the investment company sector has still outperformed by a wide margin, even with the magnifying effects of gearing.

Indeed it has been such a difficult decade for equities, it is difficult to know how much each factor has contributed to this outperformance.

Investment company discounts have held up reasonably well this year too, and this is again good news given the current climate.

The average investment company discount is currently nudging 10 per cent, compared to 12 per cent at the end of May 2010 and nearly 17 per ecnt at the end of 2008, when markets were at their worst.

Considering that the state of the global economy seems just as precarious now as it did a few years ago, this is no small achievement.

It’s also worth bearing in mind that Private Equity and Property sector discounts have narrowed considerably since the end of 2008 (although discount opportunists may still find they have some interest in the sector, with discounts in the Private Equity sector still far wider than the industry average: 24 per cent at the end of April 2012).

Clearly many investment company boards are working hard to manage the discount, but it is perhaps also the case that many investors are simply sitting on their hands.

But it is not all doom and gloom. Charles Luke, who managers the Murray Income Trust commented: "The scale of austerity and debt problems in mature economies means the economic environment is likely to be challenging for some time to come."

"However, many companies are in good financial shape and are exposed to markets that are growing."

"While earnings may moderate, corporate balance sheets are sufficiently robust to continue to reward investors with growing dividends."

Jeremy Tigue, who heads up the Foreign & Colonial Investment Trust echoes this view, stating: “Nothing illustrates what is going on in markets and economies better than the contrast between the UK growth numbers and Apple profits."

"The former shows how developed economies are struggling to recover from the global financial crisis and the latter how companies with good products are making huge strides, particularly in emerging markets; Apple’s sales in China have trebled in the last year.” 

Investors may well need to hold their nerve in the coming months, but it seems that managers continue to find no shortage of quality companies.

And as the latest investment company discount figures show, company valuations do not always reflect the macro environment.