The investment trust sector and the Four Horsemen – a review of Q2 22
Conquest and War – Russia’s invasion of Ukraine and the ongoing conflict between the two countries; Famine – at the very least the increased threat of global food shortages as supplies from Ukraine, the ‘bread basket of Europe’, increasingly become weaponised; Death – despite the roll-out of vaccines, Covid-19 continues to mutate and take lives – Q2 2022 could have come straight out of the New Testament’s Book of Revelations and its Four Horsemen of the Apocalypse. Against such a chilling backdrop, how have London’s investment companies fared – was it all doom and gloom or were there rays of sunshine to be found?
First a Q2 look at the markets…
Soaring inflation, rising interest rates and growing geopolitical tensions were always going to be reflected in the quarter’s market stats. According to JPMorgan: “the MSCI World ($ TR) ended Q2 down 16.1% (£ -9.4%), with MSCI World Growth -21.1% (£ -14.9%) and MSCI Value -11.4% (£ -4.4%).” At a sector level, the broker continues: “The only positive large sector was Energy (+27.9% $ TR), while defensives such as Utilities (-3.4%), Health Care (-5.3% and Cons Staples (-7.6%) held up fairly well. The biggest laggards were Communication Services (-21.1%), IT (-26.8%) and Cons Discretionary (-29.6%).”
As for large versus small cap, the former largely outperformed the latter. In the UK for example, the FTSE 100 closed the quarter off 3.8%. The FTSE 250, the UK’s medium-sized company index, by contrast, fell 11.0%.
…before a quick turn of the investment trust sector
Q2 22 saw the FTSE Closed End Investments index (FCEII) tumble 11.4% (sterling total return), almost matching the FTSE 250’s 11% decline. Compared to the FTSE All Share (£ TR), which finished the quarter off -5.1%, the FCEII has underperformed, but strip out the influence of a number of the sector’s heavy hitters and the gap between the two indices narrows considerably. The 32% decline in the share price of the largest trust, tech heavy Scottish Mortgage (SMT), on its own accounted for a quarter of the 11.4% fall in the FCEII during the quarter.
SMT was not the only trust to make an over-sized contribution. As JPMorgan explains: “Other costly stocks for the index – combining index weight and price performance – were Pershing Square Holdings (4.4% of the decline, – 18%), Smithson (4.0%, -28%), Polar Cap Tech (3.0%, – 19%), Monks (2.3%, – 17%), Chrysalis(2.2%, – 41%) and Hg Capital (2.1%, -23%).”
There were positive contributors to the FCEII too, but these pale in comparison to the detractors. JPMorgan continues: “The biggest positives were Syncona (1.1%, +30%), Greencoat UK Wind(0.6%, +3%), BH Macro (0.5%, up 10%) and Fidelity China Special Sits (0.5%, + 11.1%).”
In terms of subsectors, performance largely mimicked that of the wider market with growth faring worse than value and large cap outperforming small cap.
| Bottom five performing AIC sectors during Q2 | |
| Growth Capital | -29.1% |
| Technology & Media | -20.1% |
| Global Smaller Companies | -18.5% |
| Global | -17.7% |
| UK Smaller Companies | -17.2% |
Unsurprisingly the bottom five featured high up the list of those sectors that experienced a significant widening in the discounts at which their share prices trade compared to their respective net asset values (NAV).
| AIC Sector | Avg. discount as at 30.06.22 | Q2 Discount change (%) |
| Growth Capital | -31.8% | -25.1 |
| Technology & Media | -13.3% | -3.2 |
| Global Smaller Companies | -15.8% | -7.4 |
| Global | -11.0% | -7.0 |
| UK Smaller Companies | -13.6% | -3.2 |
At the other end of the scale, the infrastructure (+5.7%) and renewable energy infrastructure (+6.5%) sectors continued to trade at premia to NAV.
Drilling down to the individual trusts, Q2’s top five performers heralded from a diverse range of sectors. Stripping out JZ Capital Partners which was up 98% over the quarter thanks to portfolio sales, the top five performers were Syncona in healthcare up 28%; Tetragon Financial Group in flexible investment up 26%; Doric Nimrod Air Two in leasing up 18%; JPMorgan China Growth & Income in China up 18%; and JPMorgan Global Core Real Assets in flexible investment up 16%. As for the worst performers, JPMorgan Russian Securities (-52%), Chrysalis Investments (-41%), Baillie Gifford US Growth (-39%), Geiger Counter (-36%) and Scottish Mortgage (-30%) occupied the bottom five positions.
The bigger H1 picture
Coming off the back of a tough Q1, the poor showing in the second quarter has meant the investment trust sector finished H1 deep under water. How deep? According to broker Winterflood, “The FTSE All Share Closed End Investments Index was down 18.9% in the six months to 30 June, including a decline of 6.0% in June. This compared with a fall of 4.6% for the FTSE All Share Index in the first half of 2022. This was the worst absolute and relative performance for the sector in the first half of a calendar year for over 30 years and we estimate that it is now the leading detractor, in sector terms, in the UK market this year. This marked underperformance reflects the composition of the Investment Companies index, with some of the largest constituents seeing significant share price falls, including Scottish Mortgage (-41%), Polar Capital Technology (-28%), Monks (-29%) and Smithson (-38%).”
Pretty deep then. Winterflood continues: “…according to data from Refinitiv, the sector average discount has widened from 2.2% at the start of the year to 9.5% at 30 June. The vast majority of subsectors have been de-rated, with the largest decrease seen for Growth Capital, followed by Property – UK Logistics and Private Equity. Of the six sub-sectors that have been re-rated this year, the largest has been for Forestry & Timber followed by Infrastructure Securities and Commodities & Natural Resources.”
A recipe for concern?
Weak markets together with a generous helping of economic and geopolitical concerns are generally a recipe for poor investor sentiment. Poor investor sentiment makes the job of attracting capital that much harder which in turn typically translates into disappointing numbers, at least in terms of both IPOs and amount of capital raised.
True to form, year to date there have been no IPOs on the London Stock Exchange although Superseed Capital (WWW) was admitted to the Aquis Exchange in January 2022 after raising £2m. According to broker Numis: “we are currently in the third longest spell without an IPO since 2000 (when we started keeping records), after the GFC (Global Financial Crisis) and Covid.” Furthermore, Q2 2022 saw a drop in year-on-year net capital inflows to the investment trust sector – Q2’s £1.6 billion was 24% lower than Q2 21’s £2.1 billion.
The above capital inflow numbers, however, do not tell the whole story.
More of the story
As JPMorgan points out: “…2021 was a year of all-time record inflows for the sector so this is arguably an unreasonable comparison, and the 2022 total is higher than the £0.8bn net inflow in Q2 2020. The £1.6bn net inflow in Q2 2022 follows a £1.1bn net inflow in Q1 2022 and takes the year-to-date net inflow to £2.7bn.”
The Association of Investment Companies (AIC) estimates existing trusts raised a little over £4bn in the first half which makes this, “the third-highest amount of fundraising by existing companies (known as ‘secondary fundraising’) in the first six months of a year. The highest amount of secondary fundraising was in H1 2021, when £5.1bn was raised.”
So, not all bad then.
The ins
Infrastructure funds set the pace for secondary raisings in Q2. In total, over £1 billion was raised by International Public Partnerships (£327m), Greencoat Renewables (£235m), Gore Street Energy Storage Fund (£150m), Bluefield Solar Income Fund (£150m) and Gresham House Energy Storage (£150m). A further £571 million was raised in the property sector – Supermarket Income REIT (£308m) and Home REIT (£263m). Meanwhile with inflation at levels not seen for decades, demand for shares in portfolio protector trusts – Capital Gearing (£134m), Ruffer Investment Company (£130m) and Personal Assets (£74m) – continued to be high.
And the outs
As for Q2 outflows, Third Point Investors’ scheme enabling shareholders to exchange shares for a holding in the underlying master fund was the largest at £73 million. Widening discounts, encouraged trusts, particularly in the global sector, to buy back large quantities of their own shares – Monks (£61m), Alliance Trust (£48m), Scottish Mortgage (£39m), Witan (£38m), and F&C Investment Trust (£34m). Winterflood noted: “Across the sector, share buybacks totalled £622m in Q2 22, a 21% increase on Q1 22’s £514m.” And for H1 “buybacks across the sector totalled £1,172m, 14% higher than for the same period in 2021. Monks (£131m) has bought back shares worth more than any other fund so far this year followed by Alliance Trust (£100m), Witan (£69m), Polar Capital Technology (£68m), Scottish Mortgage (£59m) and F&C Investment Trust (£54m).”
JPMorgan, meanwhile, notes that in terms of trusts that made their exits over the course of the quarter: “the most significant in terms of the amount of capital departing were Jupiter Emerging & Frontier Income (£56m) and CIP Merchant Capital (£28m).”
Keeping calm and carrying on
Third highest first half in terms of secondary fundraisings; 14% increase in first half buybacks to £1,172m, of which £622 million took place in Q2; leadership rotating away from growth and tech to value and protection-orientated trusts – the investment company sector is doing what it always does when faced with trying times. It is adjusting to market conditions and providing investors with options for riding out what seems like a perfect storm.
Needless to say, all bets are off, if it turns out today’s perfect storm is actually being whipped up by the Four Horsemen…