Current Overview

We are beginning to see markets turn lower after a protracted period of generally sideways trading over the past few months. For numerous reasons, as alluded to in previous reports, this is not a complete surprise. Holding centre stage now is the US presidential election; a Trump win would be a shock even if over the short term. A weaker dollar and falling shares prices are predicted. Conversely a Clinton win would likely bring about a relief rally again, if over the short term. However Mr Trump’s threat to unconventionally not accept a Clinton win would bring uncertainty for sure. A narrow win for Clinton would logically be the biggest risk in this regard. Markets seek certainty disliking uncertainty.

But let us also not forget how another US central bank interest rate rise, possibly before the end of the year, may add further pressure on already wary investors. Sensibly, the Fed held off raising rates last night, requiring first the clarity of next week regarding whose policies will be in play going forward. The aforementioned contentious non acceptance scenario would likely mean any rate rise will be back burnered initially.

While economic data in the UK and US continues to provide a degree of confidence, there is a mild concern that as we move into 2017, economic growth could falter and markets are not priced for such a reality. Certainly it remains too early to know what effect (or not) Brexit will really have, not just to the UK economy but to Europe and beyond. That said after today’s High Court ruling, perhaps Brexit won’t materialise with parliament now having to decide on whether Article 50 is triggered.

Charts are suddenly looking somewhat ominous not just in equity markets but also for example in oil, which is now down 15% in less than three weeks. History has shown that markets have the potential to fall much quicker than they rise when the masses decide to hit the sell button. The S & P 500 has now fallen for seven straight sessions and this has been matched by seven straight rises in the ‘fear index’ known as The Vix would measures expected market volatility. The Vix has actually jumped by a huge 45% over the past week.

We find ourselves in interesting and uncertain times and I remained hedged to an extent for clients by holding decent cash balances on portfolios.

Investment Trusts : diversified and lower volatility options

Investors generally understand well the mechanics of owning and dealing in individual company shares. With this they comprehend the concept of risk and the potential for volatility of performance (with share prices rising and falling) in search of ultimately superior returns. Increasingly I am discussing the collective investment option (in this case in the form of the Investment Trust) with clients as viable, sensible and often suitable alternatives to direct equity strategies.

An Investment Trust is a listed company like any other company with shares freely tradable. The Trust however holds shares in many different companies dictated to the fund manager who will be operating and selecting suitable

companies in line with the agreed mandate (deed) for the overall fund (or trust). By holding many different companies within the fund, the risk is naturally spread so if bad news impacts one of the companies, the ultimate effect on the price of the trust as a whole would be diluted, mitigated by the performance of the other companies held.

Constructing portfolios of Investment Trusts is often a suitable strategy for lower starting investment capital amounts, where achieving sufficient risk diversification using individual stocks is hard. Investors new to markets may also prefer this route as experience is important when assessing whether stock market investment is suitable at all for any one individual. Investment Trusts are often used for gaining access to overseas markets where one can outsource the stock picking skills to a large investment bank that would have the necessary research resources to intelligent build portfolios of companies domiciled in other countries. For example one might invest in an Emerging Market Investment Trust which would provide exposure to the fast growing economies of China and or India.

Often I use Investment Trusts to simply provide a lower volatility core to a portfolio or to gain access to a specific area of the market, for example smaller companies which are higher risk. By owning the trust, stock specific risk is significantly reduced.

As the Trust is itself listed, there is the possibility that at any one point in time its share price will not equate to the actual value of the assets within the Trust. Thus the opportunity to buy a Trust at either a discount or premium (to the net assets) is commonplace. To illustrate, if a geographical region or sector of the market is out of favour, discounts often present as premiums do for the opposite reason. Investing at a discount to assets can in time bring gains as and when the discount narrows. A Trust trading at a premium is a fund the market is confident will see a meaningful increase in underlying asset value and is often a popular fund. Interpreting discounts and premiums is down to the broker and the client to make decisions about.

Investment Trusts who have long standing management teams are often preferred to those where there is less continuity. Potential investors also need to be aware that Trusts can borrow (or gear themselves) in search of enhanced ultimate returns but gearing brings additional risk. Borrowing levels certainly need to be understood when researching which funds are most suitable for the specific requirements of a client.

Some popular Investment Trusts for readers’ information might include Scottish Mortgage (321p) which is a global conviction position growth fund with 50% of its assets in the US. Henderson Smaller Companies (600p) which is a UK company focused growth fund paying a 3% annual income yield. JP Morgan Global Emerging Markets Income Fund (123p) is 60% Asia Pacific focused and invests in well capitalised, dividend paying EM companies.