Current investor sentiment and positioning suggest equity markets are not about to rally. 
Recent fund flow data shows a surge in popularity for absolute return and fixed income funds, with most investors selling their equity holdings for that exposure, while much of the market commentary at the moment seems to urge a more cautious stance.
In the UK, the major reason for this is the imminent EU referendum. The increasing chance of the Leave camp being victorious has thrown up a huge degree of uncertainty, with most international investors preferring to avoid owning any UK-related assets just in case Brexit – and the short-term market turmoil it is likely to create – does happen.
However, the bookies are still predicting the UK will not leave the EU and if – on 24 June – that is the case, it isn’t unreasonable to suggest that the equity market will rebound as that great uncertainty will have been removed.
Therefore, and as investment trusts tend to outperform open-ended funds in more risk-on conditions due to discount volatility and gearing, in this article we look at the closed-ended UK funds that have historically made the most of rallying markets for those investors who want to take advantage of a potential bull-run or those who prefer a higher-risk longer term strategy.
To do that, we used the upside capture ratio which shows a fund’s performance in an up market relative to an index. If a fund has an upside capture ratio of 100 per cent, it has matched the index in a rising market and if it has an upside capture ratio of say 120 per cent, it has outperformed the index by 20 per cent in rising markets.
The table below shows the IT UK All Companies and IT UK Equity Income trusts with the highest upside capture ratios over the past five years relative to the FTSE All Share, as well as their total returns and current discount to NAV.
The UK trusts with the highest upside capture ratios over 5yrs
Source: FE Analytics/ The AIC
Despite these trusts’ returns – all have considerably outperformed the FTSE All Share over the period – Brexit uncertainty is definitely taking its toll, as data from the AIC shows that six of them are currently trading on wider discounts than their one year average.
This again suggests that if a Remain vote leads to a market rebound, many of these trusts have the scope to see their discounts narrow, which could bolster returns.
Unsurprisingly in many respects, the two trusts at the top of the list are the only two UK investment trusts that solely focus on FTSE 250 stocks.
Sitting top – with an upside capture ratio of 203.15 per cent – is the five crown-rated JP Morgan Mid Cap IT. According to FE Analytics, it has also been the second best performing portfolio over the past five years from a total return point of view, with its gains of 152.91 per cent putting it some 120 percentage points ahead of the index over that time.
Georgina Brittain and Katen Patel’s portfolio made 33.23 per cent in the rising market of 2012 and 65.4 per cent in 2013 when the UK equity market made 20.81 per cent. Also, in the relatively flat market conditions of 2015, JP Morgan Mid Cap returned 42.46 per cent.
The Schroder UK Mid Cap fund, which has an upside capture ratio of 169.76 per cent over five years, has delivered a very similar return profile to the JP Morgan offering – though it did lose 10 per cent in 2014, which was a poor year for the FTSE 250, but Brittain and Patel’s trust ground out a 3 per cent return.
As such, the Schroder trust has made 73.81 per cent over five years, but is trading on a significantly wider discount than JP Morgan Mid Cap (15.81 per cent compared with 4.69 per cent).
Of course, both trusts only focus on one part – and a small part for that matter – of the FTSE All Share. Nevertheless, both have beaten their FTSE 250 ex IT benchmark over five years with an upside capture ratio relative to it of more than 125 per cent.
Performance of trusts versus index over 5yrs
Source: FE Analytics
Away from the two mid cap trusts, the closed-ended UK fund with the next highest upside capture ratio relative to the FTSE All Share is FE Alpha Manager James Henderson’s Henderson Opportunities Trust, at 167.36 per cent.
It is a genuine multi-cap offering, with top-10 holdings including blue-chips such as HSBC and Royal Dutch Shell, as well as much smaller companies such as 4d Pharma and e2v Technologies.
The trust has more than doubled the returns of its sector and the FTSE All Share over five years thanks to its stellar gains in 2012, 2013 and 2015. However, the manager’s bias towards mid and small caps along with the previously illiquid nature of its shares means it hasn’t been the best at protecting capital over the years.
Indeed, over the past half a decade, it is among the worst in the IT UK All Companies sector for annualised volatility and maximum drawdown. It has also been one of the worst performers during this year’s difficult conditions, with losses of 8.87 per cent, but that does mean the trust is now on a 14.83 per cent discount to NAV, which is considerably wider than its one- and three-year averages.
Two other multi-cap trusts also feature high up on the list: FE Alpha Manager Alex Wright’s Fidelity Special Values (upside capture ratio of 155.72 per cent) and Steve Davies’ Jupiter UK Growth (upside capture ratio of 159.27 per cent), the latter having recently changed its mandate from a global portfolio.
Also on the list is another of Henderson’s trusts, the Lowland Investment Company, which sits in the IT UK Equity Income sector. It too takes a multi-cap approach, though its income characteristics mean it has delivered a far higher total return than Henderson Opportunities and is trading on a far narrower discount.
Another IT UK Equity Income trust on the list is Finsbury Growth & Income.
The portfolio is run by FE Alpha Manager Nick Train and has an upside capture ratio of 124.15 per cent over five years.
Train focuses on high quality companies with reliable earnings and strong franchises, a strategy that has worked very well in a world of low growth and ultra-low interest rates.
Performance of trust versus sector and index
Source: FE Analytics
As such, not only has it been one of the best for upside capture ratio, it has also been one of the top performers in its peer group for downside risk, maximum drawdown, annualised volatility and risk-adjusted returns.
FE data shows this performance profile leaves the closed-ended fund well ahead of the sector and index over a cumulative five year period and it has also beaten both instruments in each of the past five calendar years.