Investment trusts are reaping the rewards from interest in alternative assets, ESG and EM. They have out-performed alternative options such as open-ended funds over recent years, and their structural strength has been clearly demonstrated in the face of Covid-19. Indeed, investment trusts achieved an average 17.8% total return in 2020 in comparison to the UK stock market’s 9.8% decline.
Increased global attention on issues of sustainability has meant that widespread interest in ESG has been at the forefront of investment trends. This reflects the notable growth of investments in alternative and less liquid assets across a variety of sectors including renewable energy, infrastructure and venture capital.
This swell is set to maintain momentum – but the first half of 2021 also suggests a strong future for foreign markets and a pivoting focus away from growth to value stocks.
Structural resilience and growth
The resilience of investment trusts stems largely from dividends protected by building reserves. It is notable that 11 trusts have increased their dividends for more than 45 consecutive years, and this security has offered vital support to shareholders throughout the pandemic while other global companies across sectors have been reducing or halting payouts; of the 21 AIC dividend heroes, all but two grew their payouts over the year to March 2021.
Majority of AIC dividend heroes deliver ahead of inflation over five years
This is not the only structural appeal of investment trusts. Their ability to hold closed-ended assets has offered a security even in periods of economic pressure, and has given the opportunity to invest in both liquid and illiquid assets in sectors that promise significant potential growth like renewable energy, private equity and digital infrastructure.
In addition, the presence of independent board members means that shareholder interest is protected, and investors can make their voices heard on proposed company changes.
Such stability has proved invaluable during a period of economic turbulence, bolstered by new attention to alternative asset classes that are able to offer substantial yields. Leading the charge in this arena are ESG assets such as renewable energy infrastructure, which has offered huge potential for growth as global economies commit to net-zero futures.
The rise of ESG and renewable infrastructure
Sustainable investment has seen universal expansion over recent years, with recent data suggesting that the European ESG and sustainable fund market alone could be worth as much as €2.5trn.
Investment trusts specifically have seen strong growth over the last 12 months as investors look to direct funds towards alternative asset classes, demonstrated by companies like Premier Miton Global Renewables, Greencoat UK Wind, JLEN Environmental Assets, Gresham House Energy Storage and US Solar Fund.
Particular interest has been seen in alternative energy type funds, like those that invest in electrification. International private equity investors are turning to clean energy, with Riverstone recently filing for a $350m IPO with their SPAC Decarbonization Plus Acquisition IV.
The momentum in these sectors is set only to increase; Edison Group’s recent initiation research on the Foresight Solar Fund (FSFL), the largest UK solar player, found that it had consistently delivered on its investment objective, while the growth potential in the solar industry remained huge with the UK’s solar capacity forecast to more than double in the next 10 years.
Emerging trends and markets (EM)
While the established trend of ESG investment builds momentum, the first half of 2021 indicates likely growth in home and more distant markets. In the last year there has been the start of a rotation back towards value stocks – a good sign for the UK market, which is more weighted in this direction than other global economies and has suffered throughout 2020 in comparison.
However, recent results indicate towards the opportunities of foreign markets. Over recent years the US has been particularly dominant, offering a diverse trust sector that allows access to emerging markets that aren’t available through the UK. Now, investment trusts are looking elsewhere.
The spotlight is turning to Asia, particularly Vietnam, and investment trusts in countries like Japan that are built upon much smaller companies.
Vietnam Holding Ltd was the best performing investment company in NAV terms in May, while the JP Morgan China Growth & Income trust was up 86.4% in the 12 months to April 2021 and VinaCapital’s Vietnam Opportunity saw 164% growth over the five years to November 2020.
These vehicles offer access to markets that are not usually open to retail investors, nor, importantly, to professional independent financial advisers.
A bright outlook
As global economies begin to consider post-pandemic recovery, there are many opportunities for retail investors to take advantage of established and developing trends in the investment trust sector.
A focus on ESG is here to stay as international governments commit to carbon neutrality, and as societies reopen, sectors that have suffered under COVID-19 will regain momentum to shift the influencing forces in the economy once again. While investors themselves may have to remain on home soil for a while longer, a keen eye should be kept on foreign markets.
The world is emerging from the pandemic into a still-uncertain future, but with their stable structures, trusts are in a prime position to keep driving strong returns for investors.