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Investment trust winners look worryingly niche

Investment trust winners look worryingly niche
June 15, 2022
Investment trust winners look worryingly niche

It’s upsettingly easy to fixate on performance in the middle of a bear market. Many portfolios have plunged into the red over the course of the past few months, with the gains of recent years starting to ebb away. But there have been a few bright spots in the funds universe, including in the alternatives space. As I noted last week, the investment trusts that launched in the heady days of 2021 have mainly held up well thanks to their focus on well-positioned sectors, from shipping to different pockets of the renewables space.

On the other side of the coin, what worries me is just how niche you have had to go with your allocations to eke out positive returns in the past six months. Of some 50 Association of Investment Companies sectors just 15 have made a positive average return over that period, with not a single major equity category making the list. Instead, it tends to be some very focused plays – from Latin America to farmland, forestry, commodities and natural resources, leasing, structured finance, hedge funds, and music royalties – that are shoring up portfolios.

Exposure to various parts of the more established infrastructure and property sectors have also served investors well. This includes UK commercial property, generalist and renewable infrastructure and the healthcare Reits. The sector averages I’m looking at can mask some pretty mixed results among individual funds, but the general trend has been positive.

For those who took a bet on commodities, (some) property, infrastructure or more esoteric alternatives of different ilks as a diversifier to equities and bonds, this might be a very pleasing development in a trying time. But it’s important to remember how binary the prospects of the very niche investments can sometimes be. To hark back to the equity space, we’ve previously warned that sector funds in areas such as energy, while appealing for their targeted approach, can often be either very up or very down, and come with much greater volatility than something better diversified.

It’s the same for some of these alternatives: shipping funds Taylor Maritime Investments (TMI) and Tufton Oceanic Assets (SHIP) have performed tremendously of late but certainly come with a good level of risk, different quirks and their own forms of cyclicality, as our latest Alpha investment trust report notes. Alternatives more generally tend to come with fairly idiosyncratic risks: think how concerns about an ecommerce slowdown have dealt a blow to some of the logistics Reits. Or to cite that six-month performance data, it’s the AIC’s Growth Capital sector – home to battered names such as Chrysalis Investments (CHRY), Schiehallion (MNTN), Seraphim Space (SSIT) and Schroder UK Public Private (SUPP) – that is rooted at the bottom of the table with an average loss of around 33 per cent. Turning to broader sectors, infrastructure trusts still tend to command some pretty high valuations, even if many argue these seem justified.

Such positions therefore need monitoring more closely, and limiting in size. With alternatives, it’s also useful where possible to have a spread of different exposures to offset the threat of the idiosyncratic problems I mention. Finally, in a market where very little seems to be working, it’s important not to get too carried away with niche, riskier investments at the expense of your unglamorous core allocations.