Scrutineer: Never mind details, trusts happy with level of recovery

Published on Sunday 23 August 2009 22:00

IS IT a 2003-style stock market rally? A 1933-style rally? or a 1975-style rally?

History divides the pundits. Having lived through 1975 and 2003 I see more parallels with the former. But past experience is of limited value. Every market cycle has its different dynamics and history never repeats itself with any exactness – otherwise rallies would be fully predictable, millions could make fortunes and we could retire in our yachts to Grand Cayman.

Such analysis also matters less to investment trust investors who are now finding a recovery (so far) better than they had dared hope. Rises from the deep falls registered earlier this year have been turbo-charged.

Investment trusts, which have the flexibility to add to their equity portfolios through borrowing, have experienced extreme volatility in the past year. Gearing – which can mete out vicious punishment in a downwave, magnifying the falls in underlying markets – can turn instantly into a virtuous friend in an upturn, magnifying the gains.

Thus, while the sector underperformed the FTSE All Share in 2008 by 7.8 per cent, the rising market of the past six months has seen the sector gain 18 per cent compared with a pick-up in the FTSE All Share of 14.5 per cent.

These average figures understate the strength of the bounce for many broad-based investment trust companies.

For example, Temple Bar investment Trust, whose resilient performance I highlighted here earlier this month, tops the UK growth and income performance table over the 12 months to August 21 with a rise of 24.5 per cent against a fall in the FTSE All Share of 4.9 per cent.

Considering that Temple Bar is such a generalist trust which rarely gets written about due to its dull demeanour and middle-of-the-road performance – the nearest thing in the investment trust world to a tranquilliser dart – this is an astonishingly good performance.

Others in the UK income and growth sector to have outperformed the All Share Index over the past year include Schroder Income Growth (up 2.9 per cent), and Edinburgh Investment Trust, down less than one per cent during one of the worst periods ever for the London stock market. British Assets Trust , the fund run out of Edinburgh by Julie Dent, is down just 0.8 per cent over one year and up 41.8 over five, outperforming the FTSE All Share over both periods.

However, the best performances have been notched up by Asia Pacific investment trusts, particularly those that exclude Japan. The average gain here in the year to end of July is 13.3 per cent, followed by the biotechnology and life science sector (up 8.4 per cent, and UK property (up 1.6 per cent). These gains however, came hard on the heels of substantial falls over the previous twelve month period. The overall average for the trust sector is a fall of 13.4 per cent – though this will have been much reduced by the gains scores in recent weeks.

One of the most popular fund platforms for retail investors is that operated by Alliance Trust Savings. It has recently reported record net purchases into investment trusts over the first quarter of 2009-10. And it has also reported some intriguing changes in the top 20 list of most popular investment trust funds in the April-July quarter.

Top of the list is, unsurprisingly, Alliance Trust itself, its appeal augmented by the decision last year to cut its exposure to financial shares, and by its generally more cautious approach. The shares are down just two per cent against a fall in the FTSE World Index of 13.7 per cent. Templeton Emerging Markets has surged up from 13th position to fourth, while Law Debenture has climbed from 12th to 9th. Mercantile, Witan, Personal Assets and Martin Currie Portfolio all make it into the to 20 most popular trusts for the first time.