Underperforming UK investment trusts such as Temple Bar, Fidelity Special Values and Aberforth Smaller Companies jumped to the top of their peer groups last month, after the US presidential election and coronavirus vaccine breakthroughs bolstered investor sentiment. 
For much of 2020, the market had been led by quality-growth stocks as the coronavirus pandemic and the economic lockdowns used to tackle it took their toll on more cyclical sectors while boosting areas like technology stocks.
However, the promise of a less erratic US administration under president-elect Joe Biden and news that several coronavirus vaccines had proven successful in trials cheered investors and led to a surge in value stocks over the course of November.
Although this trend was seen across the global equity market, the charts below reveal how significant value’s underperformance was in the UK over the opening 10 months of 2020 – and how strong its snapback was in November.
Performance of indices over 2020
Source: FE Analytics
Of course, this dynamic has had an impact on the performance of investment trusts that focus on the UK market as well. Those that have more of a value tilt have struggled to make ground this year while growth-biased strategies held up better.
But this changed in November as market leadership rotated between the two styles. Although it needs to be kept in mind that past performance is not a guide to future returns, previously underperforming strategies surged to the top of the UK sectors’ performance tables.
When Trustnet compared the quartile rankings in the IT UK All Companies, IT UK Equity Income and IT UK Smaller Companies sector between 1 January and 31 October with those from 1 November to 30 November, a clear trend emerged.
Not one of the 15 investment trusts that were top-quartile for the first 10 months of 2020 hold onto this ranking when market leadership reversed in November.
Of these 15 trusts, seven – including well-known UK offerings such as Finsbury Growth & Income and Standard Life UK Smaller Companies – went into their sector’s bottom quartile for last month’s total returns.
And of the 15 trusts that were in the bottom quartile of the UK equity sectors for most of 2020, only one remained there in November.
One more moved into the third quartile and three made second-quartile returns during the month. But 10 of the underperformers jumped into the first quartile of their sector last month.
Source: FE Analytics
These 10 trusts can be seen in the above table, ranked by the total returns in November.
At the top is British & American Investment Trust, which made almost 90 per cent in November. This followed a loss of close to 60 per cent over the previous 10 months.
This is a relatively small trust, which can mean that share price performance can be subject to disproportionate moves because of lower levels of liquidity. It also has a portfolio that is split between UK and US stocks, which means it is not as tied to the fortunes of the home market as most of its peers.
In addition, some recent changes made to the portfolio may have allowed it to capitalise on the positive news surrounding coronavirus vaccines. In the trust’s latest annual report, chairman David Seligman said: “Having trimmed some of our general sterling based investments over the last two years which we do not expect to replace in the foreseeable future, our portfolio has become more focused on our US biopharma investments which do not tend to track general market movements and which we believe hold significant investment promise as they progress steadily towards commercialisation of their ground-breaking and valuable technologies.”
Aberforth Split Level Income Trust and Aberforth Smaller Companies Trust come next. Both are managed with Euan Macdonald, Alistair Whyte, Christopher Watt and Keith Muir; while they have slightly different approach, both trusts are run with a value approach.
The trusts increased their gearing after the 2020 coronavirus sell-off, which would have the effect of boosting returns when conditions are positive.
Kepler Partners senior investment trust analyst Thomas McMahon said: “We think it is highly significant that the investment team at Aberforth have taken on meaningful gearing in the aftermath of 2020’s market crash.
“This is a rare occurrence in Aberforth Split Level’s 30-year history and has previously preceded strong market returns. We agree with the managers that a lot of the pieces are in place for a cyclical recovery in the UK once the pandemic has passed and Brexit has been resolved.
“While the immediate few months could see twists and turns in both matters, we think the sharp rally in recent weeks in value, in small-caps and in UK stocks as a whole shows that the elastic has been pulled taut and, as the managers put it, the risks to the upside have seldom been greater.”
Performance of trusts vs index in Nov 2020
Source: FE Analytics
Temple Bar and Fidelity Special Values are two highly respected UK value trusts that have struggled to make returns during the recent past but found themselves powering to the top of table in November.
While value has been rallying across the board, Fidelity Special Values manager Alex Wright pointed out that the UK market has suffered from the additional headwind of Brexit. However, there is likely to be more certainty over the UK’s future relationship with the EU – one way or another – once the transition period concludes at the end of the year.
“Both UK equities and value stocks have been out of favour for a prolonged period and their share prices have proved particularly susceptible to the pandemic. While it has proved a challenging backdrop for value investors, this has resulted in an unusually broad choice of attractively valued stocks with good upside potential, including companies whose earnings are already exceeding expectations,” the manager said.
“Improved visibility in respect of the timing of mass vaccine rollouts and in the wake of the conclusion of Brexit negotiations should boost investors’ confidence and lead them to broaden their investment horizons beyond the narrow range of secular growth stocks that have been in favour. While this may well lead them to reassess their expectations in respect of those stocks, UK value stocks remain cheap and offer some upside potential.”