Investors ready to start cashing in on their equity investments should consider maintaining their position, says Martyn Ingram of The Investors Partnership
Most seasoned retail investors have enjoyed strong performance returns from traditional investments in recent years, and some of them may want to start taking some risk off the table.
Perhaps the old saying 'Sell in May and go away' will motivate them to sell some of their mainstream investments; if so, they may be looking to reduce substantially their exposure to UK blue chip equities in the shorter term. Some may even be prepared to broaden their horizons and to consider a wider range of investment alternatives. For others, gilts - and other bonds that are perceived as low risk - would be what they would normally be looking for, but they are concerned that these types of investments may not be attractive at the moment, relative to cash.
Cash deposits should be regarded as a safe haven, especially as cash holdings can be liquidated quickly should there be an opportunity to reinvest into the bond and equity markets at lower levels. However, perhaps investors shouldn't be moving all of their investments into defensive positions right now. There are still some good opportunities out there to buy into investments that have merit over the longer term and attractions in the short to medium term.
Investment trusts and other closed-end funds have some advantages for investors when compared to open-ended retail funds, but discounts have been narrowing in recent years so it might not seem like a good time to be investing in the sector. However, when the shorter-term outlook is uncertain and the medium-term outlook is positive, there can still be good reasons for adding some investment trust holdings to portfolios.
For example, specialist open-ended funds that are held by mainstream retail investors are vulnerable to a period of underperformance if investors start reducing exposure. This is because the managers of these specialist open-ended funds have to sell off some of the underlying investments in order to raise cash to meet redemptions. Open-ended funds that attract positive inflows will have cash liquidity available to meet withdrawals; funds that need to sell holdings (especially less liquid stocks) in order to meet redemptions are exposed and may underperform within their peer group as the market falls.
However, with investment trusts that are not geared at the top of the market, this risk is largely removed. Provided a fund is well-managed and the medium-term outlook is promising, the manager can get on with managing the underlying portfolio in the best interests of investors. The manager doesn't need to sell holdings in the portfolio if individual investors choose to redeem their shareholdings; if the investment trust share price starts moving towards a large discount then it may be appropriate for the investment trust to buy back its own shares, which in the medium term should benefit investors who stay invested in the fund.
One investment trust that is worth watching is Framlington Innovative Growth, which is a defensively managed UK smaller companies fund managed by Brian Watson, who will be known by venture capital trust investors. In 2005, the fund slightly underperformed relative to its benchmark, the FTSE Small Cap (ex-IC) Index. The fund had low exposure to the mining and oil and gas sectors because of the manager's view on the risks in these sectors, so it's a fund worthy of consideration for investors with a similar view.
For investors who want to move further away from the mainstream but who wish to invest via an investment trust, a holding worthy of consideration is Finsbury Worldwide Pharmaceutical. The fund has been up-and-running for more than ten years and its benchmark is the Datastream World Pharmaceutical Index. It is managed by Samuel D. Isaly, the founding partner of OrbiMed Advisors, and specialises in the pharmaceutical and biotechnology area of the healthcare sector. If you'd like to learn more about OrbiMed's credentials then I recommend that you visit its website - www.orbimed.com
A specialist open-ended fund that doesn't show up on the radars of many investors is Hiscox Insurance Portfolio. The fund was launched in 1998 when deregulation was taking place in the Lloyd's market. Unsurprisingly, the first investors in the fund were existing clients of the Hiscox Group. The fund invests globally in insurance and insurance-related investments, and its benchmark is the Datastream World Insurance Index. Since launch, Alec Foster has managed the fund; he has more than 25 years of investment management experience, and he started his career in the insurance industry.
If you have investors who are looking for property market investments, then London & Capital's German Real Estate fund is well worth a look. It is an offshore fund that is made available to professional investors, and the minimum investment is $50,000. The fund invests in commercial properties that are acquired on a leveraged basis to take advantage of the low borrowing costs relative to rental yields, which are currently in excess of 7%. Exit penalties apply in the first four years, and valuations take place monthly. Neither of these factors should dissuade serious investors from considering the fund, as real estate is an illiquid investment and the fund is not designed for shorter-term investors.
If you have investors who would rather stick to equities and who have experience of emerging market investing, then Arab-listed equities might just scrape into their investable universe. Currently valued above $1trillion, the Arabian market represents 20% of the global emerging markets universe. The markets are volatile but the investment opportunity is considerable, even if the oil price falls to $30 a barrel again. For investors looking to take a regional approach, the Shuaa Capital Arab Gateway fund merits consideration. It is an offshore open-ended fund that was established in December 1999, and it is made available to professional investors. The minimum investment is $100,000 and valuations are monthly.
If all this seems too adventurous, perhaps a multi-manager fund would be more appealing. Most retail multi-manager funds rely on a rising equity market for performance, but there are alternatives. Thames River Hedge+ is a multi-manager fund that aims to return 10% to 15% per annum over a cycle. There are currently just under 30 managers selected for the portfolio, which comprises core and seed portfolio investments.
EIS and Seed EIS sectors
'Truly making a difference'
Avoidance, evasion and non-compliance
From 6 April 2019