The events of 2018 could be considered predictable chaos, but were Investments Trusts as predictable?
How investment trusts bucked the chaotic trend of 2018
Predictable chaos could well be the best term to describe the events of 2018. Politics was predictable, because Brexit negotiations, trade war rhetoric and emerging market elections all dominated the agenda. But each of these was chaotic, as Brexit remains unresolved, the US-China trade war became increasingly fraught and several emerging markets experienced consensus-shifting election outcomes, whose full effect is yet to be felt.
In markets too, uncertainty returned, despite being expected. It is hard to believe that this time last year we were fretting about the freakish lack of volatility in markets and basking in historically high asset prices. Now, volatility is firmly back on the agenda and valuations are increasingly being tested, even as central bankers continue following the steady path of monetary tightening.
This chaotic combination is leaving investors with a sense of unease as we enter 2019. There is no clear expected winner in asset class terms next year, as we wait to see how several trends and globally-significant events play out, while feeling the aftershock of the extended bull run coming to an end.
For the investment trust world though, the biggest surprises in 2018 came on the upside. In May, we wrote about how the spate of IPOs so far this year had shown a distinct shift away from the alternative income structures that had been favoured in the previous couple of years, back towards more traditional equity structures, such as in the case of the Baillie Gifford US Growth Trust, and other equity-focused strategies, such as Odyssean Investment Trust.
However, at that point, with the markets struggling to readjust to the challenges of volatility and reratings, we believed that the investment trust sector may struggle to attract investors over the course of the year. Instead, we have seen the trend towards longer-term equity-focused trusts be reinforced several times over in the latter half of 2018.
A spate of IPOs in the autumn, including the largest UK investment company launch ever, showed that the popularity of investment trusts was on the rise. The majority of trusts launched this year are investing in equities, although across a broad range of focuses, including AVI Japan Trust, investing in smaller Japanese companies, and the largest of all, Smithson, investing in smaller companies across primarily developed markets.
It may be a coincidence that a string of highly successful fund managers decided to launch investment trust structures this year. We believe a more plausible explanation is that, with rising market uncertainty, these managers and the multitude of investors that backed them appreciate the stability of the investment trust structure. With a fixed capital base, a closed-ended structure frees up a manager to invest for the long term, a clear advantage as trends unravel and external factors continue to exert short-term influence on markets.
Whatever the explanation, the investment trust sector has successfully bucked the trend of a chaotic 2018.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees