Thursday 11 January 2018 11:28 am Schroders Talk

Investment trust winners of 2017

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I am head of editorial content at Schroders, writing about investment, markets and financial planning.

Investment trusts enjoyed healthy investment returns last year, with funds focused on Japan delivering some of the best returns in 2017, according to data for trust sectors.

Investment trusts are an alternative to more commonly held open-ended funds or unit trusts, offering some advantages. This is explained here: investment trusts vs open-ended funds.

Here we look at some of the most popular investment trust sectors now that 2017 has drawn to a close.

It was a year in which stock markets hit new highs as investors shrugged off political worries, from North Korean missile tests to Catalonia’s independence vote, and focused instead on stronger economic growth. For the first time in a long while, the US, Japan, Europe and Asia were all growing at the same time.

Fund returns benefited as interest rates and market volatility remained close to historic lows. Stock markets rallied worldwide, resulting in a year of robust returns from most investment trust sectors.

FE has supplied data that calculates the average share price performance of the main investment trust sectors from the start of the year to 31 December. Figures for the five years to 31 December were also included, to give a longer-term perspective(1).

It is important to remember that past performance is not a reliable indication of future results.


AIC sector2017 return5-year return

Japan 32.43% 290.47%
Japanese Smaller Companies 53.17% 198.98%

AIC Japan and Japanese Smaller Companies: Source: FE, bid to bid price, lump sum percentage, in GBP, as at 31 December 2017.

Returns from the Japanese stock market were buoyed by growing company profits, positive economic conditions and the victory of reform-minded Prime Minister Shinzo Abe in October’s snap election.

Given clear evidence that the performance of corporate Japan was improving, Japanese smaller companies did particularly well. Returns from Japanese investment trusts have also been some of the strongest over the past five years.

Looking forward, a key risk is the threat that Donald Trump will implement protectionist US trade policies – President Trump has already pulled out of the Trans-Pacific Partnership, an important trade agreement. Tensions between North Korea and the US also remain high, with Japan almost certain to be dragged into any conflict.

That said, Japan, the world’s third largest economy, stands out as one of the few attractively valued stock markets globally. The government’s commitment to policies that stimulate economic growth and reforms that benefit shareholders could be supportive of further gains in Japanese equities in 2018.


AIC sector2017 return5-year return

Asia Pacific excluding Japan 26.05% 72.82%

AIC Asia Pacific – Excluding Japan Equities: Source: FE, bid to bid price, lump sum percentage, in GBP, as at 31 December 2017.

A positive economic backdrop and improving company profits drove Asian stock markets higher in 2017. At the time of writing, total returns for Asian markets were in the region of 40% in US dollar terms; the strongest returns since 2009.

Investors benefited as companies paid down debts or handed cash back to shareholders via higher dividends. Asia nowadays not only offers growth potential and reasonable valuations but income that is high and has been growing.

Matthew Dobbs, Fund Manager, Asian Equities and Head of Global Small Cap at Schroders, said Asian stock markets were boosted by strong increases in earnings and the increased expectation of further improvements to come.

He said: “We started 2017 with the market expecting 12% earnings per share (EPS) growth this year. But it looks like we will actually see 22% or more EPS growth, a far more dynamic outcome.”

Even after such a good run, valuations still remain reasonable. Dobbs cited the price to earnings (PE) ratio, a measure of the price being paid for the earnings of companies listed on the market. The higher the PE, the more expensive the earnings. He said: “The prospective 12-month forward PE ratio of the index today at 14 times is only modestly above where it was at the start of the year.”

Looking to 2018, after such a strong performance, Dobbs expects more moderate returns on a 12-month view. He added that investors will need to be selective about the companies they hold. “Although global growth feels better today and earnings growth looks healthy, there is still a very tough operating backdrop for many companies,” he said.

“The average performance for the market disguises some outsized winners that are capturing a disproportionate share of the spoils. So as investors we need to have a laser focus on the future and the rapidly shifting sands in almost all industries.”


AIC sector2017 return5-year return

UK All Companies 17.48% 71.76%
UK Equity Income 14.00% 69.01%
UK Smaller Companies 27.62% 128.37%

AIC UK All Companies, UK Equity Income and UK Smaller Companies: Source: FE, bid to bid price, lump sum percentage, in GBP, as at 31 December 2017.

UK-focused investment trusts are popular with British investors so we include figures for three of the most closely watched sectors covering a broad spectrum of the stock market.

Of the three sectors, UK smaller company trusts did best in 2017 as smaller company shares rebounded following the mauling they received the previous year from the European Union (EU) referendum.

Relatively, it has not been a great year for other UK stock market investment trusts. However, that reflects the robust performance of overseas-focused funds in what has been a strong year for global stock markets. In a more normal year, the double-digit returns UK investment trusts delivered in 2017 would have been regarded as healthy.

However, Brexit uncertainty continues to impact the UK economy. While economic growth in much of the rest of the world has accelerated, UK company profits have disappointed and the domestic economy slowed amid sluggish progress in the negotiations about Britain’s exit from the EU. Until a deal is reached, the threat of a serious Brexit shock will continue to hang over the UK market.


AIC sector2017 return5-year return

Europe 27.80% 112.82%
European Smaller Companies 43.04% 176.40%

AIC Europe and European Smaller Companies: Source: FE, bid to bid price, lump sum percentage, in GBP, as at 31 December 2017.

A year ago, investors in European investment trusts were faced with huge uncertainties on the political and economic front. The seemingly unstoppable rise of populist parties looked set to potentially derail the European economic recovery.

In the end, the year proved that in politics nothing is certain. Populism didn’t win out in crucial French, Dutch and German elections and Europe’s economy continued to accelerate.

As we enter 2018, the economic backdrop is positive. The populist Five Star Movement still poses a political risk when Italians go to the polls in the spring. In Germany, Angela Merkel is also struggling to form a new coalition, but politics is less of a risk than a year ago.

Perhaps the biggest problem for investors is that after this year’s rally some European stocks are looking expensive. There are still opportunities for skilled stockpickers to find good-quality companies at reasonable prices, but they are becoming more difficult to find.

Global emerging markets

AIC sector2017 return5-year return

Global Emerging Markets 20.83% 43.79%

AIC Global Emerging Markets: Source: FE, bid to bid price, lump sum percentage, in GBP, as at 31 December 2017.

Emerging market stock markets benefited in 2017 from an uplift in global trade, underpinned by the recovery in global growth, and US dollar depreciation. This led to positive earnings surprises. Strong performance from technology stocks has been a further feature of performance this year.

Global growth should continue to support trade in 2018, which will be positive for emerging markets. Risks to the benign outlook include a material slowdown in China’s economy, rising US interest rates, which might suck capital out of the region, and the prospect of protectionist US trade policies.


AIC sector2017 return5-year return

Commodities & Natural Resources 13.36% -40.89%

AIC Sector Specialist: Commodities & Natural Resources: Source: FE, bid to bid price, lump sum percentage, in GBP, as at 31 December 2017.

The recovery in commodity prices that started in 2016 paused in 2017, though commodity investment trusts still delivered solid returns.

A weaker US dollar and stronger economic growth could reignite the commodity recovery in 2018 by increasing demand at a time when supply remains constrained. Investors could also seek out commodities as protection if inflation starts to rise.


AIC sector2017 return5-year return

Property Direct UK 8.85% 86.78%
Property Direct Europe 15.49% 10.22%

AIC Property Direct – UK and Property Direct – Europe: Source: FE, bid to bid price, lump sum percentage, in GBP, as at 31 December 2017.

Where suitable for the individual objectives and risk appetite, some advisers recommend holding property funds as part of a balanced portfolio. Historically, commercial real estate has offered strong and stable income. Prices also often move differently to those of other assets, such as equities, potentially helping to reduce volatility in a portfolio.

In June 2016, the vote to leave the EU temporarily knocked confidence in the UK real estate market and sales of property funds. However, the negative sentiment did not last, and by the end of 2016 the UK property fund sector had returned to a semblance of normality, resulting in a good year for UK and European property investment trusts.

The structure of investment trusts makes them potentially well-suited to investing directly in property. The reason is explained here: Why are more investors are buying investment trusts?

North America

AIC sector2017 return5-year return

North America 8.18% 82.23%

AIC North America: Source: FE, bid to bid price, lump sum percentage, in GBP, as at 31 December 2017.

North American-focused funds have had a disappointing year, despite the US stock market soaring to new highs on the hope that President Trump’s tax reforms will boost the economy.

This is partly down to currency movements, as sterling has strengthened against the US dollar over the past year. When converted back into pounds, overseas stock market returns are eroded when sterling strengthens.

Valuations of US equities are now expensive relative to their historic average and global equities, though this isn’t an immediate cause for concern as we approach 2018. The housing market is strong and wage growth is broadening out, meaning the economic backdrop is supportive of further gains in US equities.

  • A full series of investment outlook 2018 articles can be found here.

Please remember that 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 any overseas investments to rise or fall. Emerging markets generally carry greater political, legal, counterparty and operational risk.

Investing solely in the companies located in one country or region carries more risk than spreading the investments over a number of countries or regions.

1. Source: FE, bid to bid price, lump sum percentage, in GBP, as at 31 December 2017.


Important information

This communication is marketing material. The views and opinions contained herein are those of Matthew Dobbs, Fund Manager, and Andrew Oxlade, Head of Editorial Content, and the named individuals. They do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds and are subject to change.

This article is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Schroders has expressed its own views and opinions in this document and these may change. 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 the views and information in the document when taking individual investment and/or strategic decisions.

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