2020's investment trust winners: time to take profits?

It has been an unusual year in markets, to say the least. The enormous sell-off that took hold in February and March was swiftly followed by a fierce rally that has come to dominate much of the year. MSCI World index rose by nearly 40 per cent in sterling terms between the start of April and mid-December. As of mid-December the index had made a year-to-date gain of 12.6 per cent.

The stock market’s biggest winners have enjoyed even greater returns and many investment trust shares, which tend to be more volatile than markets, are among them. Approximately 70 trusts have made share price gains of at least 20 per cent for 2020, as of 14 December.

While this is good news for investors at the end of a challenging year, it raises the question of whether now is the time to take some profit or even sell out entirely. While running your winners is a valid strategy, some of the biggest gains relate to trends that may slow, or dissipate, in the coming year.

The tech trade

Some 15 trusts with a focus on China or Asia, including single-country funds, have made share price gains of at least 20 per cent, in part reflecting the strong performance of Chinese stocks. But the prominence of this cohort, and trusts with a global or US focus, often stems from the huge wins made by tech majors in the pandemic.

A glance at the top 10 performers (chart 1) provides a good sense of this. Tech-happy Baillie Gifford funds are prominent here: Pacific Horizon Investment Trust (PHI) owes its success in part to the phenomenal returns of internet platform Sea (US:SE) and strong gains from other major tech holdings, including Alibaba (HK:9988). Fidelity China Special Situations (FCSS) shares a strong preference for the tech sector.

Baillie Gifford US Growth Trust (USA) has positions in Amazon (US:AMZN) and Zoom Video Communications (US:ZM), Scottish Mortgage Investment Trust (SMT) invests in US and Chinese tech, and Allianz Technology Trust (ATT) is entirely focused on this sector.

While these trends might not sustain the momentum of 2020, few would argue that they are coming to an end. Simon Moore, director of Trust Research, says: “We’re doing more online, and tech is booming. I wouldn’t think that trend is going to stop, would you?”

Chinese growth is also a story that should continue and improved relations with the US under a Biden administration could be a boost. Other Asian nations may also benefit from significant commercial activity in the world’s second-largest economy.

When it comes to areas like tech, James Carthew, head of investment company research at QuotedData, suggests that investors assess investment trusts' biggest holdings on a case-by-case basis, given that not all companies will keep up the momentum of this year. Some have concerns that this year’s events have pulled forward growth for names such as Netflix (US:NFLX), for example, while others worry about how Zoom will navigate a post-pandemic future. Your view on a portfolio’s major holdings may instruct a decision on whether to take profits.

One name that should come under scrutiny in many of the Baillie Gifford funds is Tesla (US:TSLA). Scottish Mortgage is heavily exposed, as is Baillie Gifford US Growth Trust. Edinburgh Worldwide (EWI) also has a top 10 position in the stock, despite its small-cap remit. Worries about the electric carmaker might prompt some profit-taking.

There are different ways to reallocate profits. Some investors might turn to trusts that are cheaper or look more promising, even if they operate in the same region or sector. Another option, in some cases, is to redeploy profits from a trust’s shares into a similar open-ended fund run by the same team – and to switch back if and when that trust’s shares look cheaper. Many Baillie Gifford trusts are similar to open-ended funds run by the same teams, as are names such as Polar Capital Technology Trust (PCT). However, it is useful to first understand the differences between these options. Open-ended funds may have limited exposure to less liquid assets, from unlisted stocks to smaller companies, and cannot use gearing. Other important differences could emerge, too.

Another hot sector cropping up in the figures is biotech, and healthcare more broadly. Biotech Growth Trust (BIOG), BB Healthcare Trust (BBH) and International Biotechnology Trust (IBT) have all made share price gains of more than 20 per cent.

As with tech, investors may well take a dim view if a trust has major exposure to a stock that has benefited significantly this year, in this case due to an association with one of the Covid-19 vaccines. But Mr Carthew argues that Covid-related gains are “a bit of a sideshow”, suggesting investors should stick with such trusts for the longer haul.

“There’s a bigger story in finding cures for things that weren’t curable before because we understand the genome and can make targeted therapies,” he notes. “That’s creating a whole new market for therapies. We’re just embarking on that now really.”

A golden year

Trusts including Golden Prospect Precious Metals (GPM) and BlackRock World Mining Trust (BRWM), have made huge gains amid the gold rally of 2020. Here, there are strong arguments for taking some profits. With a vaccine on the agenda and investors feeling less risk-averse, for some the precious metal and other safe haven assets should lose some of their appeal. As Mr Moore notes, precious metal markets can be “notoriously fickle” – and the huge volume of money sitting in gold exchange traded funds (ETFs) could go elsewhere, hurting prices. However, some would argue that gold remains a good hedge against any return of inflation or future market volatility.

Analysts at Stifel used a note issued in early December to make the case for taking profits on BlackRock World Mining Trust . While this was partly on valuation grounds, they also warned that a fall in special dividends received by the trust in the first half of 2020 could prompt its board to cut the dividend. The trust’s shares recently traded on a dividend yield of 4.4 per cent.

You may be tempted to take gains on hedge funds and names with a macroeconomic approach, such as Pershing Square (PSHD) and BH Macro (BHMG). Funds that take positions based on an assessment of macroeconomic trends can have big wins – earlier this year Pershing Square claimed to have made a $2.6bn (£1.9bn) profit across its funds from buying options on corporate bond markets in late February. However, funds with a macro approach can also make big losses when they get things wrong.

Other areas

Other themes may look relatively robust. Japan continues to look more attractive than it once did based on ongoing corporate reforms, and some trusts have seen certain holdings take off in 2020. M3 (JAP:2413), a company that provides medical information and services online and is a major holding of JPMorgan Japanese Investment Trust (JFJ), has performed strongly in the pandemic, for example.

Europe, similarly, remains unpopular among many investors but can be a good hunting ground for stock-pickers. Mr Carthew praises the stock-picking record of the team at Montanaro European Smaller Companies Trust (MTE), which made a share price gain of around 40 per cent this year.

Strong-performing trusts with a sustainable remit such as Jupiter Green Investment Trust (JGC) and Impax Environmental Markets (IEM) could continue to benefit from strong demand for environmental, social and governance-friendly approaches.

But remember the importance – and limits – of discounts and premiums as an indicator, especially if you are deciding what new investments to make. While instructive about whether a trust might be contrarian, or a crowded trade, discounts and premiums can persist for a long time, often for a good reason.