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Diversification wins the day

Investment trusts in aggregate massively outperformed UK equities in 2020 for reasons including tech exposure
Diversification wins the day
  • FTSE All-Share Equity Investment Instruments index massively outperformed FTSE All-Share index in 2020
  • This was in part because some of its constituents invest in areas that did well, such as tech
  • If you only focus on the UK you could miss out on investment opportunities and added return

In 2020 the FTSE All-Share Equity Investment Instruments index rose 17.8 per cent while FTSE All-Share index fell 9.8 per cent – the largest outperformance in 30 years, according to analysts at Winterflood

The FTSE All-Share Equity Investment Instruments index comprises 187 funds, which in aggregate offer exposure to equities across the world and a wide range of other assets. So after falling in early 2020, “the subsequent recovery and general health of [this index] reflects its tilt in the past 10 years towards non-equity specialist mandates and global equities, often with a technology and healthcare bent”, explain analysts at Winterflood.

These include investment trusts invested in assets uncorrelated with equities of which the share prices may fall less than FTSE All-Share index. And some funds in this index invest in overseas markets and sectors that experienced a massive appreciation last year, such as US tech stocks. It is no surprise that FTSE All-Share Equity Investment Instruments index's largest constituent is tech-biased Scottish Mortgage Investment Trust (SMT), which accounted for 11.67 per cent of it at the end of last year. This trust had a particularly good 2020 with a share price total return of 110 per cent.

The FTSE All-Share Equity Investment Instruments index’s 10 largest constituents also include Monks Investment Trust (MNKS) which, like Scottish Mortgage, is run by Baillie Gifford via a growth investment style, which has been successful in recent years. Monks also has a decent allocation to tech stocks, with 20 per cent of its assets in this area at the end of November.

Polar Capital Technology Trust (PCT) and Greencoat UK Wind (UKW), which focuses on clean energy, an area where interest is increasing, are this index’s fifth and tenth largest holdings, respectively.

The FTSE All-Share, by contrast, only includes UK-listed equities. Tech stocks only accounted for about 1 per cent of this index at the end of 2020, but financials accounted for over a quarter. And oil & gas, which is becoming less popular due to environmental concerns, accounted for 7.21 per cent. The FTSE All-Share’s weightings to such sectors mean it is seen as a value index, says Daniel Lockyer, senior fund manager at Hawksmoor – an investment style that has not performed well in recent years. And UK equities have been very out of favour due to concerns on Brexit.

“The UK market had a very tough year due to its high exposure to more cyclical sectors, such as energy, mining and financials, and negligible exposure to tech,” says Jason Hollands, managing director at wealth manager Tilney. “The constituents of FTSE All-Share Equity Investment Instruments index have exposure to a plethora of strategies and markets, many of which invest outside of the UK.”

Actively managed funds can also differentiate themselves from and outperform market indices.

Mr Hollands adds: “Most asset classes had a pretty good 2020, fuelled by huge injections of liquidity into markets. In a strong bull market investment companies should be in a good position to outperform due to their use of gearing and the narrowing of discounts to net asset value (NAV). The FTSE All-Share Equity Investment Instruments index includes many large infrastructure funds [such as HICL Infrastructure (HICL) and International Public Partnerships (INPP)], which are on hefty premiums to NAV, and have been in demand as dividends elsewhere have been slashed or suspended.”

This underscores how important it is to be well diversified so that you do not miss out on good investment opportunities and sources of added return. If you have a high enough risk appetite and long enough investment time horizon to hold equities you should not just invest in the UK, and no investor should have 100 per cent of their portfolio in equities. And when certain equity markets or other types of assets are not doing well, hopefully a diversified portfolio will not fall as far or maybe not fall at all.

Also, the FTSE All-Share Equity Investment Instruments index was helped by the success of growth-style investing, tech stocks and Baillie Gifford funds in 2020, but this will not continue indefinitely. So make sure you are not overconcentrated in these or any other areas.