investment companies index up 17.4% on a total return basis against a 10.5% rise for the ftse
The investment trust sector has had an excellent 2003 so far, outperforming the FTSE All-Share since the beginning of the year.
The Investment Companies Index has risen by 17.4% on a total return basis versus a rise of 10.5% in the FTSE All-Share to the end of July.
The outperformance is even more pronounced since the beginning of the market rally in mid-March, with investment trusts up some 29.2% to 31 July, outperforming the rise in the All-Share by 9.2 percentage points.
Charles Cade, investment trust analyst at Close Wins, said higher beta investment trusts have led the rally along with geared small-cap portfolios such as Henderson Smaller Companies, whose share price rose by 50.5% from the start of the year to the end of July.
Cade added over the same period, Invesco's English & International share price was up some 43.7% while specialist funds such as Herald and 3i Eurotech share prices increased by 57.9% and 45.7% respectively.
He said portfolios delivering strong returns to shareholders were aided by a narrowing of discounts. The average sector discount, excluding private equity funds, has narrowed by 3% since mid-March to 10.5% to 31 July.
Cade noted the past eight months have comprised two very distinct market environments that have seen different investment styles outperform in each period. From December through to March 2003, the market was depressed, with the All-Share down by 13.3%. This was followed by a recovery in sentiment from April to July, during which time the All-Share rose by 17.9%, noted Cade.
'Not surprisingly, funds with defensive portfolios tended to outperform in the first period, whereas the more aggressive funds with higher betas led the way in the rally.
The best performers in the Global Growth sector from December to March have tended to lag their peers in the past four months, with the eight best performers from December to March all bottom quartile performers from April to July,' he said.
'These were typically funds with significant weightings in fixed interest and cash, including Capital Gearing, Lindsell Train, ML Asset Allocator, Personal Assets and RIT Capital.'
However, Cade noted several exceptions to this pattern, with British Empire Securities in the top quartile during both periods, because of its value-focused investment style that targets holdings trading at discounts to net asset value, along with an underlying exposure to growth companies.
He said: 'The specialist global growth funds feature heavily in the top and bottom quartile of performers, reflecting the fact these funds tend to have more focused portfolios and have far less emphasis on benchmark weightings. Several of these types of investment trusts have performed well in the rally even though they have a relatively low beta, as a result of good stock selection.'
The best performer has been Invesco City & Commercial, which is highly geared and has a beta of 2.0.'
Such a beta reading indicates that, any rise or fall in the value of the trust's portfolio should be double that of the rest of the market. Cade added that given these characteristics, it comes as no surprise this was also the worst performing investment trust in the first four month period.
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