Investment trusts stutter in volatile quarter

Something of a reversal of fortunes among investment trusts characterised the first quarter of 2016. The largest price risers in the three months to 31 March were some of 2015's largest price fallers, most notably mining and emerging markets trusts.

Meanwhile, the largest fallers were dominated by biotechnology and UK smaller companies trusts, according to a sector review by stockbroker Stifel.

Overall the investment companies sector underperformed the FTSE All Share index over the quarter, with an average price decline of 1.6%. In comparison the FTSE All-Share index fell 0.4%.

Some trusts that were 2015's largest price fallers have begun to see some recovery more recently. BlackRock World Mining, which lost 42% in 2015, leads the list of the largest price risers as the mining sector bounced back from its recent lows.

Emerging market risers

BlackRock World Mining, one of our sister magazine Money Observer's Rated Fund for 2016, returned 29% on a total return basis. It was also the best-performing holding in our Model Portfolios over the first quarter.

Emerging market trusts were among the largest risers as the region benefited from a slight resurgence in commodity prices.

Templeton Emerging Markets returned 11%, followed by a trio of Rated Funds. JPMorgan Global Emerging Markets Income returned 9% and Utilico Emerging Markets gained 8%.

Murray International, which has high exposure to emerging market debt and equity, gained 8% after a poor 2015. Elsewhere, regional specialist BlackRock Latin America returned 16% over the quarter.

Biotech fallers

Biotech trusts have fallen out of favour, after years of dominating the top-performing fund lists. The turning point for sentiment towards biotech was the third quarter of 2015, when political uncertainty over US drug pricing heightened.

Consequently, biotech trusts were the weakest performers in the last quarter, with falls of over 20%. The weakest performer was International Biotechnology which, unlike Rated Fund Biotech Growth, does not have an active discount protection policy.

UK smaller company trusts were the other prominent price fallers. At the beginning of the year the average discount for the sector was 4%. By the end of the quarter, however, this had widened to 13%.

Trusts that saw the steepest derating included BlackRock Throgmorton (-10% discount derating), along with Rated Funds Aberforth Smaller Companies (-9% discount derating) and Henderson Smaller Companies (-9% discount derating).

The fact that the investment trust sector has struggled so far in 2016 can be largely explained by discount movements, according to research by Winterflood Securities. The average discount across the industry has widened from 4.8% at the start of the year to 7.9% currently.

The stockbroker states that this mainly reflects weakening demand from retail investors, against a backdrop of a rise in market volatility and uncertainty generated by the forthcoming European Union referendum.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.