Despite the Brexit vote and the general underperformance of the FTSE All Share so far in 2016, a number of investment trusts in the UK All Companies sector have low cash balances and high gearing – suggesting continued bullishness on the home market.
The EU referendum in June put the UK market on the back foot, with the FTSE All Share falling 7.01 per cent over the course of two days.
As the below graph shows, despite a pick up in the months since, the UK market remains behind the curve in 2016, returning 13.68 per cent to investors.
Performance of indices in 2016
Source: FE Analytics
This is 27.16 percentage points behind the best performing market (the MSCI Emerging Markets) and is even behind the much unloved continental Europe index (MSCI Europe ex UK).
Despite this, some investment trusts in the IT UK All Companies sector are geared up by more than 10 per cent, with little-to-none of it sitting in cash.
One of the investment trusts with the most to gain or lose from the UK market is the Fidelity Special Values trust, run by FE Alpha Manager Alex Wright.
The fund, which is 88.20 per cent invested in companies domiciled in the UK, has net gearing of 5.5 per cent according to the latest data from the AIC – the highest in the sector – with none held in cash. His exposure to GBP earnings is 33 per cent, or 3 per cent overweight
Wright focuses on two main areas. He looks at companies with limited downside risk, those that have exceptionally cheap valuations or some kind of asset that should stop their share prices falling below a certain level.
Secondly, the manager looks for events that could significantly improve a company's earning power, but aren’t currently reflected in its share price.
The £530m trust includes the likes of Shell, Ladbrokes, Wolseley, Royal Mail and Citigroup among its top 10 holdings.
It has a strong track record of outperformance, beating the FTSE All Share over three, five and 10 years.
It is also a top quartile performer in the UK All Companies sector over 10 years, and is first or second quartile over one, three and five years, as well as shorter timeframes.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
As the above graph shows, the trust, which yields 1.68 per cent and has an ongoing charges figure (including performance fee) of 1.10 per cent, has returned 133.80 per cent to investors over the last decade.
This is 62.13 percentage points ahead of the FTSE All Share and 73.87 percentage points above the sector average, with particular outperformance following the financial crisis in 2008.
Going forward, Wright said in the latest factsheet that the gap in valuations between stocks seen as safe and those seen as riskier is now as high as it has have ever been.
“We will look for insight on levels of confidence among consumers and companies in the UK economy,” he said.
“Consensus expectations suggest that this should deteriorate, but how this picture develops will help us to determine the real attractiveness of these stocks.”
The fund currently trades on a discount to net asset value of 11.8 per cent, closing last week at 200p.
Another trust backing the UK market is Henderson Opportunities, run by FE Alpha Manager James Henderson.
The £92m trust, which is 99.4 per cent invested in the UK, is 13 per cent geared and has 0.6 per cent held in cash, according to figures from the AIC. 
It has a number of mid and small-cap companies in the portfolio, including its top holding 4d Pharma, as well as other top 10 holdings Conviviality, e2v Technologies and Micro Focus International.
As a result, the fund has struggled so far this year, losing 4.70 per cent as this area of the market was hit particularly hard by the fall in sterling and the drop in investor sentiment.
However, this has picked up in recent months, and the fund has been a top quartile performer over the last one and three months.
Manager James Henderson (pictured) said: “Now we’ll see how things pan out over the next period and learn about what the new government will be doing and how it will negotiate and what sort of deals the UK will have, and as that uncertainty comes along we expect some stocks will benefit and some won’t and it’s a real good time to be thinking about companies.”
The fund has been a top performer over five years, returning 131.79 per cent over the period, but has struggled over one and three years, as investors have moved to risk-averse mentalities.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund, which is currently trading on a 17.6 per cent discount to NAV, has beaten the sector and benchmark by 70.25 and 77.81 percentage points respectively over the last five years.
Closing at 824p on Friday, Henderson Opportunities currently yields 2.2 per cent and has an OCF including performance fees of 1.96 per cent.
Invesco Perpetual Select UK Equity is the third UK trust significantly backing the domestic market, with a gearing of 11 per cent and cash weighting of 0.3 per cent.
The £66.9m five crown-rated trust, run by FE Alpha Manager Mark Barnett, was launched in 2006, and over the timeframe has been the second best performer in the sector.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The fund has returned more than double the FTSE All Share over the period (77.05 percentage points) and almost triple the sector average (92.31 percentage points).
It is 85.7 per cent weighted to the UK market, with the likes of British American Tobacco, AstraZeneca, BAE Systems and BT Group among its top 10 holdings.
Post the Brexit vote, the investment trust’ss strategy remained unchanged favouring companies with revenue, profit and cash-flow visibility, which are focused on delivering shareholder value in the form of a sustainable and growing dividend.
In the latest factsheet, the fund said: “Although directionally predictable, the scale of the decline in Brexit-sensitive UK equity sectors was more severe than the fund manager had expected.
“As a result, whilst there has not been a fundamental shift in sector allocation, he has sought to identify opportunities in certain areas suffering the worst of the sell–off.”
The fund, which currently trades on a 2.3 per cent discount to NAV, has been a top quartile performer over three and five years.
Invesco Perpetual Select UK Equity currently has a yield of 3.7 per cent and an OCF including performance fees of 1.58 per cent.