Investment Trusts: Opportunities in all market conditions

Over the last 150 years the UK investment trust industry has survived depressions, wars, pandemics and many other crises.

Today’s market conditions bring their own challenges, but history suggests the industry is well-positioned to cope. Here, we take a look at how current market conditions are impacting Schroders investment trusts across five sectors.

Private equity

 
Investment trusts are a very appropriate structure for private equity, providing a permanent source of capital to be deployed in less liquid assets. A diversified portfolio of private equity assets offer the potential to deliver premium long-term returns to compensate for this higher risk.

Private equity is clearly not immune to economic headwinds, but it does represent one of the best ways of accessing structural global trends, such as digitisation, disruptive innovation and energy transition, where long-term growth is more assured. We can therefore remain confident in the enduring opportunity that Schroders private equity investment trusts are targeting.
 

Impact investment

Schroders provides impact solutions that aim to alleviate some of the UK’s most pressing social challenges. As with private equity, many of these opportunities are illiquid and therefore not easily accessible without specialist expertise.

Almost two-thirds of its social impact assets benefit from inflation-linked revenues. More broadly, this area should be less impacted by current market volatility, due to these types of investments

historically having low correlation to traditional asset classes. Indeed, the current economic challenges mean the social issues they aim to address are even more pressing.

UK equities

For much of 2022, markets have been influenced by global headwinds, but in recent weeks, domestic events have contributed to the volatility. The media narrative suggests the mini-budget prompted a loss of confidence in UK plc, but it is interesting to note that the UK stock market is still outperforming most other major stock markets this year.

The UK is home to many large, global businesses that derive most of their revenues and profits from overseas. The sterling value of their international earnings is therefore enhanced by a strong dollar.

From the perspective of dividends, this is making the long-term income opportunity from UK equities even more enticing. Mid-sized UK companies tend to be more focused on the domestic economy, and sterling weakness may lead to more merger and acquisition activity in this part of the market.

Asian equities

Dollar strength is typically seen as a headwind for Asia’s economies and stock markets. The prospect of sustained inflation across a number of commodities, as well as headwinds to export demand, pose further challenges for the region.

Meanwhile, China’s struggles with Covid continue to weigh on sentiment. Nevertheless, this gloomy prognosis appears to have already been largely discounted. Aggregate valuations for the region are now trading at or below long-term averages, suggesting that the bad news may already be in the price.

Real estate

Like private equity, real estate is another asset class that is highly suited to the closed-ended investment trust structure, because of the illiquidity of the underlying assets. Property has many attractive investment characteristics. It has traditionally been seen as a good way of introducing more diversification to a portfolio, with low correlations against equities and bonds and less volatility than equities.

Furthermore, rents tend to rise in line with other prices over the long term, providing the potential for a partial hedge against inflation and, because it is a physical asset, there is more opportunity for skilled managers to add value through redevelopment and operational improvements.

However, despite these strengths, real estate is not immune to economic headwinds. Higher interest rates have a direct impact on the ability of debt-backed investors to buy real estate and they may deter institutions that allocate capital between real estate and bonds.

Although real estate yields are not mechanically tied to interest rates, they are likely to increase in the short term, depressing capital values. In addition, weaker growth is likely to reduce occupier demand, particularly in sectors that are already under pressure from structural changes such as e-commerce and home working. By contrast, a number of other real estate types are benefitting from structural change including warehouses, data-centres, student halls and laboratories.

Summary

These are clearly challenging times economically, and the near-term outlook is perhaps as inscrutable as it ever has been. Looking beyond short-term uncertainty, it is worth reiterating the long-term perspective and discipline that is normally required for successful investment outcomes.

The average UK investment trust is trading at a 15% discount to its net asset value (source: Bloomberg as at 30 September 2022).This is the widest discount in at least a decade and means investors can currently buy a pound’s worth of assets for just 85p. Irrespective of the current uncertainty, therefore, attractive long-term opportunities can be found, and investment trusts remain a highly attractive structure.

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Important information

This information is a marketing communication

Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise.

The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations.

Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions.

Schroders has expressed its own views and opinions in this document and these may change.

We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don’t already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk

Before investing in an Investment Trust, refer to the prospectus, the latest Key Information Document (KID) and Key Features Document (KFD) at www.schroders.co.uk/investor or on request.

Issued in October 2022 by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registration No 4191730 England. Authorised and regulated by the Financial Conduct Authority