Russia’s brutal war in Ukraine has at times threatened to tip over into wider conflict, but it has also fuelled the global price inflation that was already gaining momentum in the aftermath of the pandemic restrictions.
Markets globally have felt the brunt of global fear: the US S&P 500 index lost as much as 13 per cent over the first quarter of 2022, and remains more than 5 per cent down as at 4 April. European indices unsurprisingly did even worse, with the Eurostoxx 600 rebounding from a 15 per cent fall but still 6 per cent off its January values. The FTSE All-Share has done relatively well and now sits just 1.5 per cent lower than at the start of the year.
But the fact is that investors have been here before. While it may be tempting to pull your money out and sit on the sidelines, you risk losing out if you do, because markets are apt to bounce dramatically as sentiment turns – whether that is in the wake of war, pestilence or financial crisis.
John Newlands, a longstanding investment trust expert who now runs his own investment trust consultancy, gives as a prime example the 1973/74 bear market following the Middle Eastern oil crisis. “The then leading UK indicator, the FT-30 index, shot forward by more than 90 per cent. Investors who had lost faith and moved into cash were kicking themselves for years afterwards,” he says.
Something similar had previously happened at the end of World War Two: “There was a sharp uptick in markets as the end of the war became more certain, and it caught many investors by surprise. I personally expect something like this to happen when the guns fall silent in Ukraine.”
Given the 150-year-plus track record of investment trusts in particular, and their reputation as a robust and well-diversified route for accessing risk assets, can we take further reassurance from their long history and fortunes in past crises?
When World War One broke out, the London Stock Exchange suspended dealing for several months, leaving the 90 plus investment trusts and their boards to manage as best they could without an open market to trade on.
In his book Put Not Your Trust in Money (1997), Newlands quotes investment trust historian George Glasgow, who wrote in the inter-war years: “It would be hard to imagine a worse financial crisis, spread over five years, than that of the Great War. Yet the investment trusts weathered it. At one point towards the end of the war there did arise the spectre that in case the war were lost, the investment trusts might one and all have to liquidate themselves … to pay for defeat; but that spectre disappeared and finally all was well.”
The 1920s saw a gradual shift in the balance of investment trust portfolios from purely fixed interest towards equities, and the formation of a spate of new trusts between 1926 and 1929 – just in time for the Wall Street Crash of 1929. In under three years, the US Dow Jones index lost 89 per cent of its value.
Even then, none of the older, long-established UK investment trusts with diversified portfolios and decent revenue reserves collapsed. “In the UK, investment trusts certainly suffered, but survived the 1929 crash in relatively good shape, having avoided the worst excesses of the rush into unsafe investments, and in many cases having sold US securities in anticipation of a severe fall,” writes Newlands.
The older portfolios also typically had adequate reserves to see them through the tough bear market years that followed, “and survived the Depression well”.
In contrast, he adds: “Newer, less well-diversified funds, which had had little time to build up reserves and possibly had borrowed into rising markets as well, took a real hammering and some went to the wall.”
Andrew McHattie, publisher of the Investment Trust Newsletter, makes the point that some UK trusts did have to reduce or suspend dividends as a consequence of the 1929 crash.
Lessons had been learnt during the first war; when World War Two began, the UK government was better organised, and the stock market remained open during much of the conflict. At its end, 211 trusts with assets of £300mn moved into the post-war era and “the cult of the equity”.
Conflicts far from home have also had an impact on the sector. One of the biggest shocks to markets since the 1940s was the 9/11 terrorist attacks of 2001. Since the 1940s, the biggest single shock to markets has been the 9/11 terrorist attacks of 2001, which came hard on the heels of the imploding tech bubble in 2000. Annabel Brodie-Smith, communications director at the Association of Investment Companies, draws on AIC data to demonstrate its impact – and also the importance of being in the market for the recovery. “If you invested £100 in the average investment company at the beginning of 2001, by the end of September your investment would be worth just £74,” she says.
“By the end of 2004, the Iraq War had begun and that investment had recovered to £82 – still 18 per cent below its original value. but two years later, markets had bounced back and it was worth £131. Today, the original £100 would be worth £572 – a return of nearly six times your original investment in just over 21 years.”
Investment trusts have structural strengths in this regard. Their closed-ended structure means the manager does not have to compromise on portfolio quality in order to provide cash when investors are nervous, while the ability to retain up to 15% of dividends received as a reserve to maintain payouts to investors in leaner years also adds to resilience.
Brodie-Smith adds: “Of course, their share prices suffer in the eye of the storm, but when markets recover investment companies bounce back strongly.”
