2017 was generally a good year for those investing online in ISAs and SIPPs with UK stock brokers. While London’s stock market didn’t have the stellar performance of peers in the US, much of Europe and Asia, a 13.1% return from the FTSE All-Share Index and 11% for the FTSE 100, including dividends, was more than solid.
And those with international exposure would have done even better as would those who opted for investment trusts offered by online stock brokers. The FTSE index tracking trusts returned a very tasty 18.4% on a total returns basis.
The bad news is that analysts at UK stock brokers and market makers Winterflood believe that the ‘easy money’ may have already been made last year. While not predicting a market crash, the company’s analysts think trusts are unlikely to be the same cash cow over 2018. Quoted in the Telegraph, Winterflood caution:
“The investment trust sector has enjoyed a strong period of growth and, while this could continue in 2018, we believe that current discount levels present a risk, should or when the market sees a downturn.”
The strong performance of trusts, and the markets in general, mean that discounts are narrowing. The price of investment trusts, because they are traded like stocks, don’t always exactly reflect the value of their holdings and can be priced at either a premium or discount. If demand for a trust is high it may trade at above what its assets are worse and below what they are worth if markets get worried. This is because shares in investment trusts tend to be less liquid than the shares of the listed companies they hold, increasing volatility.
Last year, with the exception of one trust dragged down by the Gulf Investment Fund which lost 19%, every kind of investment trust covered by Winterflood gained. This has led to a narrowing of discounts and more than a third of the sector now trading at a premium. Trusts holding Japanese smaller companies (+52%), European smaller companies (+45%) and property securities (+37%) were the best performers. While their underlying holdings also did very well, the trusts themselves showed significantly higher gains.
Heeding Winterflood’s warning of the increased risk higher premiums and smaller discounts now prevalent in the trust sector means, The Telegraph’s Questor investments tipping column suggests a focus on non-cyclical industries with strong growth. The Worldwide Healthcare, BlackRock Smaller Companies and Schroder Income Growth trusts, offered by most UK online stock brokers, are picked out as matching that criteria.