Falling markets can be useful in many ways. They can provide attractive entry prices for long-term investors. And they can reveal who has been swimming naked.
The alternative attraction
In the world of investment trusts, we’ve seen an explosion in so-called ‘alternative assets’ in recent years. They are designed to pay out a high level of income and also to provide some capital stability.
How have they fared this year I wondered? Was any alternative sector caught a little short when investors started getting nervous?
I’ve looked at data for the year to 21 December 2018 and grouped together various investment sectors in the table below:
| Focus | Positive returns | Trusts | % Positive |
|---|---|---|---|
| Asia Pacific | 5 | 38 | 13% |
| Europe | 2 | 18 | 11% |
| Latin America | 0 | 5 | 0% |
| North America | 2 | 10 | 20% |
| UK | 6 | 67 | 9% |
| Global | 6 | 52 | 12% |
| Flexible | 9 | 22 | 41% |
| Hedge Funds | 5 | 13 | 38% |
| Private Equity | 10 | 20 | 50% |
| Property | 15 | 40 | 38% |
| Infrastructure | 7 | 7 | 100% |
| Renewables | 8 | 11 | 73% |
| Leasing | 8 | 9 | 89% |
| Debt | 21 | 34 | 62% |
| Biotech | 4 | 7 | 57% |
| Commodities | 0 | 10 | 0% |
| Other specialist sectors | 3 | 23 | 13% |
| VCT General | 36 | 43 | 84% |
| VCT AIM | 3 | 9 | 33% |
| VCT Other | 15 | 27 | 55% |
| Total | 165 | 465 | 35% |
Let’s begin with some caveats…
Most of this year’s market falls have taken place in the last three months and many alternative funds only update their net asset values every three or six months. This means they may not have published any valuations since the carnage began and therefore investors have limited information on how they’ve fared recently.
What’s more, because many use internally derived valuations rather than market prices (as none are typically available), it may take a little longer for wider stock market falls to be reflected in their asset values.
That said, the early data seems fairly promising.
The best performers
Infrastructure and leasing funds have held up the best in terms of percentage of positive figures. On the return front, they produced an average of 10% and 11% respectively. Decent stuff.
However, you might argue infrastructure was helped by the fact it was out of favour a year ago when the prospect of a hostile Labour government (hostile to private infrastructure projects that is) started to appear much more likely. The bid for John Laing Infrastructure also helped to renew investor interest.
The renewable infrastructure sector also did well and came in with an 8% average return.
I was a little surprised to see how well venture capital trusts and private equity have held up. This might be due to the delayed valuation effect (for want of a better phrase) and that a number of funds in these sectors are winding down and therefore less prone to moody markets.
Biotech — a great performer for many years — proved to be fairly resilient in 2018 as well.
Debt funds have done ok and have returned 3% on average. But I’d be worried about the strength of this sector in any prolonged economic downturn. The recent troubles at Funding Circle (not to mention the financial crisis of a decade ago) illustrate how less robust lending practices can go undetected for longer than you might suspect.
The laggards
Property funds fared a little worse than debt funds, with less than half of them in the black and a zero average return. But with big REITs like British Land and Land Securities down some 15% in 2018, a zero return doesn’t seem too bad by comparison.
Hedge funds continue to frustrate. They are designed, in theory, to provide steady gains whatever the weather, but less than half put in a positive performance. Their average return this past year? A big, fat zero per cent.
Flexible funds have done ok, but they haven’t been the safe haven that many people might assume they are. This was another zero return sector in 2018.
Most plain vanilla equity funds, whether they have invested globally, in the UK, or in a single country/region have really struggled. Only a tenth provided positive returns, with average losses in the region of 10%.
Within equities, North America performed best (flat-ish) and global trusts were down some 3% or so.
Commodities provided no refuge whatsoever. No positive returns and down 11% overall.
Other specialist sectors (a real mish-mash covering forestry to financials and insurance) fared little better than commodities.
A decent result overall
About a third of all investment trusts have produced a positive return over the past year, which is a higher percentage than I would have guessed. The average return is about minus 2%, which compares to minus 6% for global markets in sterling terms.
Lindsell Train was the best-performing mainstream fund (+35%). Its premium to net asset value continued to increase, driving a large chunk of its share price gain.
Syncona (+29%) and 3i Infrastructure (+25%) were the best performers among the larger funds (£1bn+).
No one knows which way this market will go from here. But it does seem like the average alternative fund is doing what it’s supposed to — so far!
Merry Christmas to one and all!