Ian Cowie: counting the very high cost of ‘home bias’

By buying familiar names, investors kiss goodbye to significantly greater global returns. Our columnist looks at star trusts that have outperformed and why.

With no cure in sight yet for the coronavirus’s threat to global health and wealth, investment trusts can at least claim to have halved the financial pain so far. While the FTSE All Share index - a broad measure of the British market - has lost more than a fifth of its value, or 21.1% this year, the FTSE Equity Investment Instruments index, a benchmark of all investment trusts in the All Share, has fallen by nearer a tenth, or 10.8%.

Those bland numbers disguise the drama of recent stock market turbulence. The flash crash that began on 19 February took little more than four weeks to wipe out 35% of all the value that had accrued on America’s Standard & Poor’s 500 index since it was set up in 1957.

Then, after the market bottomed toward the end of March, the S&P 500 bounced back in April to enjoy its best month since 1987. But while the S&P has recovered most of its Corona Crash losses to trade 14% below its 2020 peak, the FTSE 100 benchmark of Britain’s biggest shares remains 23% beneath its high point.

This goes some way to explain why investment trusts have beaten the All Share by such a wide margin.

The latter is focused on the UK, which not only has the virus to beat now but Brexit to deliver in the imminent future. By contrast, many investment trusts enable individual shareholders of all sizes to spread our money around the globe, enjoying professional stock selection in economies of which we may know little and exposure to markets that trade while we are asleep.

How has that worked in practice? The proof of the pudding is in the performance data. The Association of Investment Companies (AIC) Global sector has delivered double the returns of the AIC’s UK All Companies sector over the last year, five years and (almost) 10-year periods.

According to independent statisticians at Morningstar, the AIC Global sector average returns over those periods were 11%, 88% and 242% respectively.

By contrast, the UK All Companies sector averages were minus 17%, plus 15% and 134% respectively.

Those widely contrasting numbers illustrate the very high cost of ‘home bias’, or City jargon for most investors’ preference for keeping their money close to home. By buying familiar names, they are saying goodbye to global returns much greater than those Little Englanders got.

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Simon Elliott, head of research at Winterflood Investment Trusts, told me: “Of the 202 investment companies that are constituents of the All Share, 98 have outperformed the index so far this year. Of the 20 largest investment companies, 17 have delivered relative outperformance. Given these account for 44% of the sector by market cap, their impact is significant.

“This includes such investment trusts as Scottish Mortgage (LSE:SMT) (stock market ticker: SMT), which is up 21% so far this year; HICL Infrastructure (LSE:HICL) up 2% and Polar Capital Technology (LSE:PCT) which is up 17%. Infrastructure and Global funds are heavily represented, accounting for 14 the top 20 funds.”

While SMT and PCT yield 0.4% and zero respectively, HICL may interest income-seekers with a yield of 4.9% as part of total returns of 10%, 44% and 156% over the last year, five years and 10 years respectively. It targets “investments in essential community assets with strong cash flow and defensive market positions".

Just over 70% of the fund is invested in public/private partnerships (PPP), primarily hospitals and schools. Three quarters of HICL’s assets are invested in UK infrastructure, with 17% allocated to the European Union and 8% America.

While HICL leads its sector over the last year, 3i Infrastructure (LSE:3IN) is the top performer over the last five years and 10 years, with total returns of 83% and 253%. It yields 3.4% but suffered shrinkage of 1.5% last year. 

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Annabel Brodie-Smith, a director of the AIC, pointed out: “Two important reasons for investment companies outperformance this year are global diversification and the ability to invest in resilient alternative assets such as infrastructure.

“We know from past experience that investment companies tend to bounce back quickly when markets recover. This is because their closed-ended structure allows managers to take a long-term view and position their portfolio for recovery.”

That is reflected in the fact that during April’s bounce, investment companies were up 8% whereas the All-Share increased by 5%. Better still, it is not too late to find bargains.

The average investment trust discount was only 1.1% at the start of this year but ballooned out to 22% by the middle of March. Since then, it has narrowed but the average investment trust share price remains 8.4% lower than its net asset value (NAV), which is more than a third cheaper than the average discount to NAV of 6% during the last decade.

Trusts named: 3i Infrastructure (3IN), HICL Infrastructure (HICL), Polar Capital Trust (PCT) and Scottish Mortgage Trust (SMT). 

Ian Cowie is a shareholder in PCT.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.