On the face of it, 2021 has been a disappointing year for investment trust performance.
The Closed-End Investments Index returned a very respectable 12.8%, but that was 5.5% behind the All-Share Index’s 18.3% return. Meanwhile, the MSCI AC World Index, boosted by the 28.1% return from the US, returned 20.1% in sterling.
This follows a year 2020 in which the Closed-End index returned 17.8% – 27.6% ahead of the All-Share index, the biggest gap in 30 years. This caused many UK institutional investors to complain about the inclusion of investment trusts in the All-Share index, arguing that it caused them to underperform, which was unfair.
However, in 2021, after this brilliant year 2020, the investment trusts retained the All-Share. What happened?
Why has 2021 been a tougher year for investment trusts?
The average discount to net asset value (NAV) of investment funds fell from 1.7% to 1.5% in 2021, so the underperformance cannot be explained by widening discounts . Indeed, a new record capital of £12.2 billion was raised for existing trusts and an additional £4 billion for 15 new issues.
This, combined with performance and after deducting some capital repayments, took the industry’s assets to a record high of £227.6 billion, according to the Association of Investment Companies (AIC). Net capital raised of £14.9bn was, according to JP Morgan Cazenove, 247% higher than in 2020. This, alongside the low discount to NAV, does not suggest any loss of investor confidence. in the area.
Although much of the equity component of the sector, especially global funds, is growth-oriented, this has not necessarily been a problem. Although value stocks, which had lagged significantly in 2020, outperformed growth, the gap was narrow. The MSCI World Value index in sterling gained 23.9% and Growth 22.5%.
According to JP Morgan Cazenove’s estimates, what held the sector back was mainly asset allocation, ie too much exposure to lagging sectors. Stock selection, leverage (borrowing) and non-UK exposure all contributed to performance relative to the All-Share Index.
The average return for trusts in the UK commercial property sector was 30.2% and seven funds in the broader property sector returned over 40%. Private equity, where value was abundant in both valuations and discounts, returned 42%. The property and private equity sub-sectors account for £20bn and £27bn in value, over 20% of the total.
The performance of growth trusts, however, lagged. Tech trusts (£7bn in value) returned 19%, while the Dow Jones Technology Index returned 30% in sterling terms and healthcare trusts (£6.4bn in value) generated a weighted average of -5.3%, compared to a return of 21% in sterling terms from the MSCI. Global Health Care Index. The poor performance of biotech stocks, overrepresented in the investment trust sub-sector, was a major contributor to this underperformance.
Growth-oriented generalist trusts also underperformed. Giant Scottish Mortgage Trust, valued at more than £20bn, returned 10.5% – but had more than doubled in 2020. Its performance in 2021 was well below that of global indices. Sister trust Monks, with £3.3bn in assets, returned just 1%. Baillie Gifford’s other trusts also lagged, including Edinburgh Worldwide (-21%), UK Growth (8%), European Growth (4%), US Growth (-5%), Japan (-10%) and Shin Nippon (-17%). Pacific Horizon (15%), however, had a surprisingly good year (more details below).
Why did these and other growth managers perform poorly? Probably because they turned to promising growth stocks at the expense of what Ed Yardeni calls “the magnificent eight” at the top of the S&P 500, which continued to gain momentum. In 2022, however, it may be a different story.
The overall performance of investment trusts was also held back by steady returns from much of the “alternative” sector, which now accounts for almost half of the total. While private equity and most property funds performed well, the weighted average return for the renewables sector (valued at £15bn) was 8%. It was not higher in the rest of the infrastructure sector (valued at £17bn) with the honorable exception of 3i Infrastructure (+19%). Most debt funds also produced modest returns, in line with their objectives.
How China Has Recorded Emerging Markets Returns
President Xi’s crackdown on the private sector has caused a bear market in Chinese stocks, with the MSCI China index falling 20%. Whether the outlook for investment in China deteriorates, stabilizes or improves is probably the main uncertainty in the coming years. China, excluding Taiwan, represents 31% of the MSCI Emerging Markets Index and 37% of the Asia ex-Japan Index (Hong Kong is considered a developed market, so companies listed there are not included in emerging markets but represent an additional 7% in Asia ex-Japan). China’s drag led to small declines in both indexes.
Despite this, some trusts in the sector have performed remarkably well, notably those specializing in India, Vietnam and frontier markets. The three Asian smaller-company funds, whose benchmarks have much lower exposure to China, also performed well. Skepticism about the Chinese companies of Mobius Investment Trust (+12%) and Pacific Assets (+15%) paid off, but Baillie Gifford’s Pacific Horizon Trust’s 16% return was the most notable, as it tracked a 133% return in 2021.
Also notable was RIT’s 35% return, which has set itself the goal of lagging on the upside in order to protect itself on the downside. Caledonia (+44%) is doing even better. Both have benefited from the success of their private equity investments. Among global trusts, strong investment performance but no private equity led AVI Global, Mid-Wynd and Brunner to return over 20%, while nearly all small-cap trusts out of all markets, with the exception of Japan, performed well.
Many UK funds beat the All-Share index with Merchants (+32%) and Fidelity Special Values (+27%) leading. The same was true in Europe where BlackRock Greater Europe (+32%) leads the pack and the 6% appreciation of the pound against the euro did not appear to dampen returns.
Overall, there have been many triumphs, some disappointments, but very few disasters. Good fund managers don’t shuffle their portfolios or make drastic changes to their investment styles, so it’s no surprise that some of 2020’s heroes had a disappointing year. In contrast, most of those who struggled in 2020 were rewarded in 2021 with better market conditions for their specialties and styles.
Bears believe persistent inflation and rising interest rates will make 2022 a tough year; bulls that economic growth will support the upward trend in corporate earnings and that a return to normalcy in monetary policy is healthy. Whatever the reason, investment returns for both growth (but not at any price) and value investors should be healthy over the next five years, which should be the horizon of most investors.