Financial disasters happen when the last person who can remember what went wrong last time has left the building. That’s what a wise old bird told this cub reporter, when I started work in the City office of a Fleet Street newspaper more than three decades ago.
So it is with a sense of foreboding that I note the imminent retirement of emerging markets veteran Mark Mobius, as first disclosed by Citywire. This will follow hard on the heels of the forced departure in unrelated and unhappy circumstances of another investment trust guru, Sam Isaly of Worldwide Healthcare Trust (WWH), as discussed in this space last month.
Both sectors have enjoyed strong performance recently, with global emerging markets delivering total returns of 29% over the last year, 46% over the last five years and 124% over the last decade. Meanwhile, independent statisticians at Morningstar report that the Association of Investment Companies (AIC) biotech and healthcare sector gained an average of 35%, 154% and 532% over the same periods.
The equivalent figures for all investment trusts – excluding venture capital trusts and 3i Group (III) – are 20%, 104% and 211%. No wonder seasoned observers are beginning to suffer bouts of vertigo.
For example, Simon Elliott of Winterflood Securities claims current investment trust valuations are ‘vulnerable to a setback’. He points out: ‘The average discount ended the year at 3.3% compared with 5.1% a dozen months earlier.
‘This year will see the 10th anniversary of the global financial crisis. With the bull market now in its ninth year, there will no doubt be speculation that a setback is imminent.
‘The investment trust sector has enjoyed a strong period of growth and while this could continue in 2018, we believe that current discount levels present a risk should or when the market sees a downturn.’
You can say that again, since the AIC reckons the average discount has now shrunk to 2.8% – or less than a seventh of the 20% discounts that were widely – available when I first began buying investment trust shares a quarter of a century ago.
In much the same way that soaring house prices provide a warm feeling of wealth for baby boomers but warn of the risk of negative equity for first-time buyers, lofty share prices could mean low returns for novice investors today. Against all that, with bond yields and cash deposit rates not far off historic lows, anyone seeking income or gains will struggle to find a better hole to go to.
Stock selection will be of prime importance and investment trusts’ closed-end structure will continue to give them significant advantages over open-ended rivals. Alan Brierley of Cannacord Genuity explains: ‘The illiquidity of some asset classes means they are best suited for closed-end funds.
‘Most notable inflows last year went into infrastructure – about £8.7 billion; debt £6.5 billion and real estate £6 billion. Since the stock market nadir or low point in March 2009 the average investment trust has returned 267% compared to the FTSE All Share index – a broad measure of the London market – delivering 224%.’
Similarly, Charles Cade of Numis Securities, observes: ‘Finding value among investment companies is increasingly difficult, but we see some opportunities among UK funds that are out of favour, notably Edinburgh (EDIN) investment trust. In addition, there are numerous well-managed Asian funds trading on double digit discounts.
‘Valuations have not yet reached the bubble-territory seen in early 2000 and credit markets are in a far healthier state than during 2008. Without major political or economic shocks, 2018 could end up being very similar to 2017.
‘Indeed, the year has started strongly, but with equity markets at all-time highs, we believe that investors should maintain a diversified portfolio and be willing to take some profits from funds that have rallied strongly, particularly if they are now trading significantly out of line with their historic discount range.’
You can find information about current and historic discounts for individual trusts and their sectors under the ‘performance’ tab on the AIC website, as well as similar data on platforms including Britain’s biggest, Hargreaves Lansdown. However, do be careful to double-check these stats as the imposition of new regulatory requirements seems to be making some systems buckle under the strain.
Most importantly, investors should beware complacency and remember a trend is only a trend until it stops. Those of us who survived stock market crashes in 1987, 2000 and 2008 should need no reminding that, while the views are wonderful from up here, it’s a long way down.
Here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.