Investment trusts weather the eurozone storm
Annabel Brodie-Smith, communications director at the AIC, takes a look at the performance of the closed-ended sector during the recent market turmoil.
The financial headlines continue to be gloomy, with the Olympics resulting in a brief period of respite for sports fans. In less than two weeks we’ve seen a drop in UK GDP for the third quarter in a row, yet more controversies in the banking sector, and the Bank of England has revised down its economic forecast for 2012. Mervyn King’s predictions of further storm clouds from Europe ahead won’t come as a huge surprise to anyone, but it’s nevertheless difficult to know where to turn for cover.
The poor economic data notwithstanding, some investment company managers have long been highlighting the difference between raw economic data and the health of UK PLC. Charles Luke, manager of Murray Income Trust
, states that:
“The financial crisis, austerity and the woes of the eurozone have all combined to ensure that UK growth has been anaemic at best. This situation is unlikely to change for some time as policy-makers grapple with the indebted state of most countries in the developed world. However, many companies have been quick to adapt to this paradigm by reducing their own borrowings, strengthening their balance sheets and improving their operating performance. Indeed, many businesses have been able to maintain healthy growth in part due to being exposed to markets where demand remains strong. This again highlights the disconnect between domestic economic activity and company performance."
Fortunately, data this week from Winterflood Securities suggests slightly better news for stock markets, despite some recent ups and downs there too. Winterflood point out that July was another positive month for equity investors with the FTSE All Share up 1.3 per cent. Investment companies outperformed for the fifth month this year, and over the year to date, the average investment company is up 2 per cent to 31 July 2012 in share price total return terms – and that’s assuming a 3.5 per cent deduction for charges, stamp duty and market spread. Less than inspiring perhaps, but returns in positive territory are reassuring – for now at least.
One sector that has shone so far this year – and indeed over one, three, five and ten years, has been the IT Sector Specialist: Biotechnology and Healthcare
. Often heralded as a defensive play, the sector is up a massive 28.49 per cent over the year to 31 July 2012 in share price total return terms. It has also outperformed the wider investment company sector over three, five and ten years. Of course whilst seen as a defensive sector by some, it is clearly not a sector for the faint hearted and should be part of a diversified portfolio. But in a difficult environment, it’s interesting to see this sector is doing well.
Performance of sector over one year to 31 July 2012
Source: FE Analytics
Recent research from Cannacord Genuity comparing the performance of investment companies with open ended funds again suggests that the investment company sector has much to feel optimistic about. Entitled ‘Investment Companies Fuddy Duddy Olympics 2012’ in riposte to the cliches that are occasionally made about a sector that has been going strong since 1868, the research – based on end May data – suggested that head to head, closed end funds outperformed their open ended rivals in three quarters of cases. The report states that over both five and ten years investment companies have outperformed OEICS and unit trusts in every core regional sector, suggesting the sector is anything but fuddy duddy.
In the current economic climate, it can be even harder than usual to see the wood from the trees when all the economic data is negative. But whilst investment company managers are under no illusion about the difficult conditions they are operating in, managers continue to talk with great conviction about the strength of many companies both at home and away. So despite the difficult economic headlines, the ‘keep calm and carry on’ ethos remains as wise as ever.