Investment Trust Insider - Opening the door to investment trusts

Register to get unlimited access to our investor forum and all editorial content, including our e-zine and weekly email. Registration is free and only takes a minute.

Ian Cowie: a lesson from Black Monday’s blockbuster trusts

12 Comments
Ian Cowie: a lesson from Black Monday’s blockbuster trusts

Liquidity, or the lack of it, is sometimes cited by financial intermediaries as a reason not to recommend closed-end funds like investment trusts because, they argue, a fixed supply of shares on the market may not be able to cope with rising demand without distorting prices.

On the other hand, they point out that open-ended funds, such as unit trusts or exchange-traded funds (ETFs), can always create new units to meet a spike in demand created by a financial fad or marketing push.

So much for the upside of units but the downside can prove very disadvantageous when the problem is not buyers but sellers. Next week will mark the 30th anniversary of the 1987 stock market crash and should prompt investors today to reconsider which form of pooled fund can best cope with such shocking setbacks and even thrive in the aftermath.

Talking to experts about Black Monday, 19 October, 1987, reminds me of why it is wrong to focus on liquidity – the ability to buy or sell stock when you want – as a disadvantage of investment trusts for advisers and wealth managers when it is an advantage for investors. Investment trusts can always be traded on the London Stock Exchange – although you might not like the price. By contrast, nothing on earth can force a unit trust manager to pick up the phone and make a market in their own units if they don’t want to.

Regulations are all very well but in moments of crisis markets can be affected by human emotion and other irrational factors. If that sounds theoretical, then consider stock market historian John Newlands’ recollections of Black Monday. He told me: ‘The thinking of anyone based in the south of England was in danger of being warped by effects of the Great Storm in October, 1987.

‘City of London workers arose to a backdrop of fallen trees on crushed cars, blocked commuter routes and even, in the pre-mobile era, of cut telephone lines. This combination created a sense of fear that a market collapse was in progress.

‘Today, my message is twofold. First, panicking does no one any good. Second, never buy a unit trust or an open-ended investment company (Oeic). In the 1987 crash, many unit trust houses took their phones off the hook because they could not cope with the wave of redemptions. At least investment trust investors who did want to get out, could do so, albeit at a depressed market price.’

Nor is John the only one who recalls this often-overlooked aspect of Black Monday. Richard Plaskett, investment trust director at JPMorgan Asset Management, pointed out: ‘At times of market stress, the closed-ended nature of investment trusts comes into their own. Trusts do not have to meet the cash outflows from redeeming investors and so are not forced to sell assets into illiquid, stressed markets.

‘Indeed, in the period immediately following the Black Monday crash, some trusts were able to use free cash and leverage to acquire stocks at prices that looked very attractive as markets rebounded.’

Top 20 trusts since 1987

Investment trust / company AIC sector  £
Rights & Issues (RII)  UK Smaller Companies 12,604
ICG Enterprise (ICG)  Private Equity 3,562
Scottish Mortgage (SMT)  Global 2,570
Finsbury Growth & Income (FGT)  UK Equity Income 2,440
European Assets (EAT)  European Smaller Companies 2,428
Pantheon International (PIN)  Private Equity 2,420
Law Debenture Corporation (LWDB)  Global 2,391
F&C Global Smaller Companies (FCS) Global 2,224
Henderson European Focus (HEFT)  Europe 2,122
Mercantile (MRC)  UK All Companies 2,115
BlackRock Smaller Companies (BRSC)  UK Smaller Companies 2,061
Capital Gearing (CGT)  Flexible Investment 2,028
North Atlantic Smaller Companies (NAS)  North American Smaller Companies 1,992
British Empire (BTEM)  Global 1,925
Bankers (BNKR)  Global 1,827
Murray International (MYI)  Global Equity Income 1,825
JPMorgan MidCap (JPM)  UK All Companies 1,720
Monks (MNKS)  Global 1,711
Temple Bar (TMPL)  UK Equity Income 1,664
JPMorgan American (JAM)  North America 1,623
Average investment trust   1,383
Average unit trust, open-ended investment company   796

Source: AIC using Morningstar data showing £100 investment from 30/9/1987 to 30/9/2017, excluding 3i

This helped closed-end funds trounce their open-ended rivals over the 30 years since Black Monday. According to Morningstar, £100 invested in the average unit trust immediately before the 1987 crash would be worth £796 today. Not bad when you consider only £258 was needed to match inflation, according to the Bank of England. But pretty poor compared to the total return of £1,383 delivered on the same sum by the average investment trust; or 74% more than the average unit trust.

You can see the top 20 investment trusts over the last three decades in the table. Annabel Brodie-Smith, a director of the Association of Investment Companies, told me: ‘It’s striking that a wide range of investment company sectors feature in the list of best long-term performers, which demonstrates the versatility of the structure across different investment areas.’

Of course, lower costs and gearing (the ability to borrow and invest more money) also played their part in outperformance but it is wrong to overlook the importance of liquidity. Like insurance for homeowners, liquidity for investors can seem like a tedious detail – until there is a crisis and the ability to get back into cash becomes the only thing that matters.

 

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Fund managers in the news today
Events
  • Selectors take in the stunning views at the Citywire Switzerland 2012 event in Gstaad

    Selectors take in the stunning views at the Citywire Switzerland 2012 event in Gstaad

  • Alejandro Espina meets Rodrigo Ramirez from Banco General in Panama

    Alejandro Espina meets Rodrigo Ramirez from Banco General in Panama

  • Citywire Deutschland 2013

    Citywire Deutschland 2013

  • Sabrina meets Vania Mareuse from Bryan Ganier & Co in Paris

    Sabrina meets Vania Mareuse from Bryan Ganier & Co in Paris

  • Delegates fill up their plates with gourmet food at the Citywire France 2012 retreat in Chantilly.

    Delegates fill up their plates with gourmet food at the Citywire France 2012 retreat in Chantilly.

  • Jesus Sobral with Arnaud Sttutterheim of Persist in Amstemveen

    Jesus Sobral with Arnaud Sttutterheim of Persist in Amstemveen

  • Jesus Sobral with Rico Bosma, Wealth Managers Partners in Amstemveen

    Jesus Sobral with Rico Bosma, Wealth Managers Partners in Amstemveen

  • Beatrice meets Alessia Paradiso, GWA Sim in Rome

    Beatrice meets Alessia Paradiso, GWA Sim in Rome

  • Citywire's Beatrice Mancini meets the UniCredit team during her trip to Milan

    Citywire's Beatrice Mancini meets the UniCredit team during her trip to Milan

  • Angus meets Karla Borland, head of mutual funds and ETFs at Credit Suisse, in Singapore

    Angus meets Karla Borland, head of mutual funds and ETFs at Credit Suisse, in Singapore

  • Meeting with old friends from Erste Bank in Vienna

    Meeting with old friends from Erste Bank in Vienna

  • The global team headed to Asia in December 2012 to host the first Citywire event on the continent

    The global team headed to Asia in December 2012 to host the first Citywire event on the continent

  • Delegates at Citywire's Vienna event attend the group workshops and presentations

    Delegates at Citywire's Vienna event attend the group workshops and presentations

  • Citywire Global editor Amy Williams greets Reyl Singapore's Daryl Liew during her trip to Asia

    Citywire Global editor Amy Williams greets Reyl Singapore's Daryl Liew during her trip to Asia

  • Citywire's Beatrice gets in the frame with Chiara Bellon of Vontobel Europa in Milan

    Citywire's Beatrice gets in the frame with Chiara Bellon of Vontobel Europa in Milan