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Investment Trust Forum: Catching trends with trusts

The structure of investment trusts makes these collective investment vehicles a superb way to get exposure to a range of asset classes, geographies and investment styles. Investment trusts also aim to get the most from active fund managers by combining the oversight of a fully-independent board with a close-end structure that safeguards against volatile flows of money in and out of funds. 

Going for growth

The high valuation of hot stocks coupled with the threat of inflation has got some investors spooked that there could be trouble ahead for investors in the world’s best growth companies. 

Matthew Tillett, the manager of global growth and income investment trust Brunner, sees some reasons for caution, but only for very highly-rated, jam-tomorrow shares. Quality growth plays may in fact be particularly well suited to deal with inflation thanks to their ability to pass on cost increases to customers. 

Tillett’s trust is targeting several structural growth themes that should benefit investors for many years to come. Brunner’s heavy exposure to healthcare companies is a play on ageing populations in developed countries. Digitisation also continues to be a major opportunity for growth and so too does the energy transition.

Over the last decade, there has been much excitement around disruptive business models. But in the decade ahead, incumbents may have more to offer growth investors. Such companies have the deep pockets needed to fund the costly transition needed to avert a climate crisis. Incumbents also look better positioned to lead the linear technological innovation that may characterise the transition to a more sustainable future.

 

What does good look like?

Sustainability and impact investing could help solve some of the most pressing issues of our day. 

Andrew Douglas, Head of ESG and Climate at Daiwa Capital Markets Europe, highlights that many green investments, such as wind and solar farms, represent illiquid assets. Investment trusts provide an excellent way to gain exposure to these kinds of hard-to-trade investments. But the Investors’ Chronicle’s Dave Baxter points out, there are trade-offs with portfolios of illiquid assets and a trust’s ability to manage its shares’ discount or premium to net asset value (NAV). Fees are also often relatively high at specialist green funds. 

Greenwashing is an ever-present danger, points out Elizabeth Pfeuti, Chief Client Officer at

Rhotic Media. Clémence Chatelin, Head of Sustainable Investing at Paradigm Norton, suggests knee-jerk divestment from foot-dragging, carbon-intensive companies is not necessarily the answer. Such action could ultimately do more harm than good. Recalcitrant companies benefit from the involvement of shareholders intent on pushing them towards a greener future.

Jeremy Rogers, Chief Investment Officer of Schroder’s Big Society Capital investment trust, points to the role of improved disclosure in combating greenwashing. Rogers also sees an important role for trusts to have a positive impact beyond headline-grabbing climate issues. 

The creation of social impact bonds has opened a way for his trust to try to do well by doing good across a broader range of areas. This includes funding programmes to stop domestic violence and to reduce reoffending by ex-prisoners. These bonds make a financial link between better social outcomes and the benefit of not having to dealwith the fallout.

 

Emerging market magic

Sustainability is also a pressing issue in many emerging markets. Investment in these regions is riskier than in developed markets. James Carthew, co-founder and Head of Investment Company Research at QuotedData, believesthat depending on personal circumstances it’s not outrageous for investors to have10 to 20 per cent of theirportfolios in this area. 

Despite strong growth prospects and low valuations, the Investors’ Chronicle’s Mary McDougall highlights that emerging markets have had a relatively tough couple of years. 

Ross Teverson, Jupiter Asset Management’s Head of Strategy, Global Emerging Markets, and manager Jupiter Emerging & Frontier Income trust, believes the swift rollout of vaccines will help increase international interest once again. The containment of the collapse of Chinese property giant Evergrande may also calm investors’ fears about the region.

Away from the emerging market giants of China and India, there are a host of other exciting opportunities. One of the most exciting is Vietnam. 

Craig Martin, Chairman of Dynam Capital, which runs Vietnam Holdings investment trust, believes the frontier market is set to recapture its long-term record of 6 to 7 per cent annual economic growth following a brief lockdown hiatus this summer. Martin says that following arapid vaccine roll-out key partsof the country’s economy arenow “buzzing”.