Investment trust shareholders know how vulnerable such portfolios can be to shifts in sentiment, and that’s most obvious when we experience big market moves. A challenging 2022 for equities was especially cruel to trusts – including those that rode high before interest rate rises changed the way we view growth investments. Think of the poor Chrysalis (CHRY) shareholders sitting on a 52.6 per cent loss for the 12 months to 23 January.
And yet that dynamic works in the other direction. Markets (and currencies such as sterling) have looked healthier in recent months, and some of the most wounded investment trusts of the past year have seen their shares snap back in an exaggerated fashion. A glance at three-month share price total returns shows Chrysalis investors made an enormous 55.6 per cent gain – not enough to erode those previous losses, but something to take heart from. And some other growth trusts have also enjoyed big wins.
Montanaro European Smaller Companies (MTE), another trust caught in the eye of a style rotation, has made 27 per cent on a total return basis, with Henderson Smaller Companies (HSL) and Baillie Gifford European Growth (BGEU) both registering gains of more than 20 per cent in that very short three-month period. This puts them nicely ahead of the 16.2 per cent sterling total return from the FTSE Europe ex UK index, which outperformed all other major regional indices (including the FTSE 100, 250 and Small Cap indices) over the same timeframe.
Other trusts that have looked especially out of favour have enjoyed their own momentum: turning to a region many have labelled uninvestable in recent years, JPMorgan China Growth & Income (JCGI) and Fidelity China Special Situations (FCSS) made gains of more than 40 per cent. Logistics play Tritax Big Box Reit’s (BBOX) shares returned nearly 15 per cent while some of the private equity trusts also banked big gains.
This sizeable rebound will have reassured plenty of investors: think of those Chrysalis shareholders who invested in 2021, only for shares to begin a long nosedive in the later months of that year. Or even those who bought the trust in 2022, hoping that a huge sell-off and massive share price discount to net asset value (NAV) looked overdone. Now there’s at least some good news – or even an opportunity to take some profits.
But nice as it is to see trust shares making such huge gains, I would still caution against reacting too instinctively to such moves. For one, momentum investors should be wary of buying trusts that appear to be making big short-term gains, given they may simply be rebounding from lows after a particularly fierce sell-off. Such a rebound may again give way to further market pessimism.
Conversely, those who see such a bounce as a way to exit a disappointing investment should first briefly reconsider why they want to get out, and whether such action looks justified. Your long-term rationale for buying in the first place may still hold up – even if factors such as higher interest rates do take some of the gloss off the likes of growth funds. As with any review of a holding or portfolio, it’s important to ask why you made an investment in the first place, what a reasonable time horizon might be, and what role a fund or share might have in your portfolio.
