Best year of the decade: 2009

Looking back over the last year, it's remarkable to think that 2009 turned out to be the best year of the decade in share price terms for the investment company sector.

Indeed the average discount at the end of December 2008 languished at 18 per cent, and with the UK in the throws of "credit crunch" panic, it seemed hard to imagine a quick turnaround in stockmarket sentiment, let alone produce the best annual performance of the decade.

But turnaround it did. Cazenove points out that the FTSE Equity Investment Instruments Index (the investment trust part of the FTSE All Share) rose by some 37.9 per cent, outperforming the FTSE All Share Index by some 6 per cent. Of course this recovery was from a low base, and the effect of discount narrowing has been a boost to the sector. Indeed the sector closed 2009 on an average discount of 10.8 per cent.

Interestingly, not all discounts narrowed in 2009. An exception has been the much coveted UK Growth and Income investment company sector. The average discount for this sector was as low as 1.4 per cent by June 2009, but closed the year closer to 7 per cent. Analysts at Oriel Securities put this down to the search for 'safe haven' blue chip portfolios and higher yields which characterised the beginning of 2009, replaced later in the year by an increased appetite for risk as markets improved. They now believe that the UK Growth and Income sector is representing reasonable value in discount terms.

Winterflood Securities explains that the majority of the investment company sector’s outperformance last year came in the first quartile when markets were probably at their most volatile. This is an interesting anomaly considering that investment companies tend to outperform in rising markets and underperform in falling markets due to the effect of gearing.

The reverse was true last year, with the sector underperforming during the second part of the year, when markets as a whole actually rallied. Winterflood thought the investment companies’ outperformance at the beginning of last year down was due to being underweight banks, which struggled in the first part of the year, and of course the effects of discount tightening.

Last year was also an interesting year for corporate activity. Some 10 investment companies broadened their investment remit (compared to just 6 in 2008), illustrating a pick-up in activity, as well as illustrating the influence of the independent Board in ensuring investment companies stay as competitive as possible. We also saw an increase in management group changes - 9 in 2009 compared to just 3 for the whole of 2008.

Of course many may choose to remember 2009 as the year that zero dividend preference shares ("zeros") returned to vogue, with five investment companies raising money through zeros. These tended to be in the more specialist sectors.

In July, Ecofin Water & Power Opportunities, a Sector Specialist: Utilities investment company, raised £140m, with £60m of this through zero shares. A further four investment companies, all in the Private Equity sector, raised funds through the issue of zero shares.

In June, JZ Capital Partners raised £10m through the issue of zeros. In August, Electra Private Equity raised £43m through the issue of zeros, in November JPMorgan Private Equity raised £30m through the issue of zero shares, and in December F&C Private Equity also raised £30m through the issue of zeros.

The economic landscape still looks uncertain, with inflation figures showing a pronounced jump, and interest rate rises a possibility.

Despite this, markets are to date still taking all this in their stride – indeed uncertainty has become something of the norm over the last couple of years.

Time will tell if market rises will continue but the speedy turnaround in performance in 2009 at least shows how quickly markets can change. But as Warren Buffet once said – "If past history was all there was to the game, the richest people would be librarians."

Annabel Brodie-Smith is communications director at the Association of Investment Companies (AIC). The views expressed here are her own.