Investment trusts have worst year since 2008

In the Winterflood Annual Investment Trust Review of 2022 it revealed the “challenging year” the space had gone through.

The FTSE All Share Closed End Investments index was down 16.6%, the worst return since the financial crisis, and lagged the wider UK market for the second year in a row, as the FTSE All Share index returning 0.3%.

The resulting difference of -16.9% was the highest level of relative underperformance on record, and meant the trust sector was the biggest detractor from the FTSE All Share last year.

This is a long way from the record highs of 2020 when the average trust returned over 25%.

Where will the funds flow in 2023?

It was worth noting that the FTSE All Share was well buffered by its over exposure to oil & gas and industrial metals & mining which all rallied as a consequence of the war in Ukraine and the consequential energy crisis.

In the report the analysts said they had had high hopes coming into 2022. Following two years of pandemic they anticipated an improvement in global economic growth fuelled by pent-up consumer demand that would prove favourable to equities.

“Sadly, our optimism proved very much mis-placed, with a war in Europe, global inflationary pressures and political turmoil in the UK combining to create an extremely challenging investment backdrop,” they said.

According to the analyst, a key driver of investment trusts’ underperformance was widening discounts, with the average discount widening from 2.5% to 13.3% last year.

“We attribute this to negative investor sentiment in an uncertain macroeconomic environment and fears around liquidity,” the report said.

Looking ahead the analysts advised caution as the macroeconomic outlook “is far from rosy,” however they added they were optimistic for 2023, stating “we believe that the sell-off last year has led to attractive opportunities”.

The “dramatic derating” in recent months could be an “exciting” entry point for long-term investors to access portfolio previously on a premium.

Smaller board and new manager for reformed JPM Russia portfolio

But this was balanced with caution that some net asset values may have further to fall.

Additionally, Winterflood predicted an end to the IPO dry spell, hoping that “one successful new launch may foster increased confidence for subsequent attempts”.

Last year there was not a single new trust to IPO on the London Stock Exchange, the first time this has happened since 1978.

Winterflood expected a new launch to come in the alternative asset classes and focus on attractive levels of yield and strong dividend growth prospects.

However, issuers may still struggle with new launches since many existing portfolios are trading at a discount, meaning “risk-averse investors may be reluctant to support new vehicles with no established track record”.

Indeed, just £5.5bn was raised last year across the sector, a 64% decrease on 2021 and the lowest level since 2012.