There are a number of reasons to be wary of the current market conditions: the US market is trading on high multiples, there has already been a sell-off in the fastest growing areas and the market is down from its peak in February.
Investors worry that widening discounts could compound their losses when the market starts to turn, but our data shows that it could be a matter of picking the right funds rather than jettisoning the sector.
The last time the market suffered a sustained sell-off was in the summer of 2011. Between 11 July and 5 October 2011 the FTSE All Share fell 13.98 per cent and the average UK All Companies investment trust 15.36 per cent.
The larger and more liquid trusts did better, with the FTSE All Share Equity Investment Instruments sector down just 14.83 per cent. This measure includes a number of funds representing specialist sectors such as private equity, however, so is not the best guide for investors using trusts for equity exposure.
Performance of index and sectors in 2011 correction
Source: FE Analytics
Some of the trusts that did well during this period are unsurprising: both Personal Assets Trust and Ruffer Investment Company have a strong philosophy of capital preservation, a multi-asset approach and a programme of share issuance or purchases that minimises the volatility of the price around NAV.
RIT Capital Partners shares these characteristics except for the discount control mechanism. All three sit in the IT Global sector.
The Cayenne Trust is a lesser-known trust to have held up well in this period, losing just 7.46 per cent.
This is another multi-asset portfolio but takes on a trust of investment trusts structure. Only 15.7 per cent is in fixed interest, but the equity exposure is diversified geographically. There is also significant exposure to private equity and to property.
It was recently cited by Oriel analysts as one to look to in a market correction.
In the UK sector the Capital Gearing Trust managed to lose only 1 per cent during this period. The trust has a multi-asset approach and uses other investment trusts widely.
Some of the other trusts to do well are more surprising however: FE Alpha Manager Mark Barnett’s Keystone IT lost just 6.7 per cent. The same manager’s Invesco Perpetual Select UK Equity fell 10.84 per cent, also improving on the figures for the FTSE.
Performance of trusts vs sector and index in 2011 correction
Source: FE Analytics
In fact, both trusts have volatility scores less than that of the FTSE over the past five years and also do better in terms of maximum drawdown [the most you could lose if you bought and sold at the worst times].
However, it should be mentioned that in the 2013 sell-off in the spring the Invesco Perpetual UK Select Equity fund fell further than the market.
Most of the straight equity funds did indeed underperform the index in the 2011 sell-off, no matter how good their track record over the longer term.
Schroder UK Growth, Threadneedle UK Select and the specialist Crystal Amber Trust were the only other three to have lost less than the 13.98 per cent of the All Share.
In the global sector Monks, Mid Wynd, Martin Currie Global portfolio and Miton Worldwide Growth managed the feat.
The latter is a specialised portfolio of trusts the manager thinks are deeply undervalued with minimal risks of widening discounts. For this reason it might hold up better when markets fall but isn’t a straight UK equity fund.
Funds of investment trusts offer one option for investors who are concerned about a toppy market and want to minimise the risk of a market fall hurting their IT holdings.
Five fund of trusts managed by Paul Craig managed to beat equities during the 2011 dip, according to our figures.
Henderson Cirilium Balanced fell just 7.45 per cent, Henderson Cirilium Strategic Income 7.69 per cent and Henderson Cirilium Moderate 11.47 per cent.
Henderson Cirilium Dynamic lost only 23.58 per cent, just shy of the index’ fall, despite being the most aggressive of the range.
Performance of Cirilium range in 2011 correction
Source: FE Analytics
Henderson UK Strategic Income, run by the same manager, fell 11.59 per cent.
The Cirilium fund range is being sold to Old Mutual by Henderson although Paul Craig will remain the manager. The transfer is not expected to happen until the end of the year.
FE Trustnet looked in detail at the portfolios last year.
The Henderson UK Strategic Income fund will continue to be run by Henderson, however.
Some funds of trusts suffered badly during this period, however, with the Jupiter Fund of Investment Trusts losing 18.12 per cent and the F&C MultiManager Investment Trust down 17.61 per cent. Halifax Fund of Investment Trusts fell 16.78 per cent. This suggests fund selection is key.
However, our research recently highlighted that funds of investment trusts have an excellent track record over a whole market cycle.
