In investing, as in many other areas, hindsight is always 20/20. It might be irritating to be told what you should have done a year ago, but looking back can also help us spot trends, reflect on our past choices and inform future ones.
The chart below lists the eight investment trusts that returned more than 90 per cent in the year to 1 July, including the five that offered more than 100 per cent – and would have doubled your money.
The list reflects the themes, sectors and regions that investors were especially keen on over the past 12 months: space, biotechnology, miners, emerging markets and tech.
When a holding doubles in a year, it is legitimate to wonder whether it has more room to run or is becoming overvalued, especially with funds and investment trusts, which are not as volatile as shares.
The answer, as ever, depends on your risk appetite and investment style: a contrarian investor would want to get out much faster than a momentum one. Consider valuations and outlook for the assets.
For trusts, discounts can be a useful indicator. The chart below shows how these trusts’ discounts to net asset value (NAV) have moved in the past year. Most of them have closed less than you might expect, showing that most of the performance came from the underlying assets. Seraphim Space (SSIC) is the exception here – there has been ample demand for its shares, and at one point this year its premium was as high as 26 per cent.
Space, biotech, natural resources
The enthusiasm is not unwarranted, and the hype around SpaceX (US:SPCX) didn’t hurt either. But the trust’s portfolio has grown at an impressive rate. Its biggest holding, Finnish satellite company ICEYE, is profitable and expanding, and made up 47.1 per cent of the portfolio by the end of March. Earlier this month, the company announced a funding round that, if successful, would value it at more than €10bn (£8.6bn) and would lift the trust’s NAV by a further 40 per cent. This makes the small premium (around 6 per cent) at which the shares are currently trading look relatively justified, although buying trusts at a premium always feels quite risky. After the transaction, Seraphim would become even more concentrated, so investors should be aware of the single-company risks. We discuss the trust in more detail here.
Elsewhere, all three biotech trusts made this list, showing how strong this sector has been, driven by a flurry of M&A activity. The trusts’ shares last reached dizzying heights during the pandemic, and after a long period of poor performance, they are off again. Still, it has been volatile. At the time of writing, Biotech Growth Trust’s (BIOG) share price was still a whisker off its January 2021 peak.
Of the three trusts, RTW Biotech Opportunities (RTW) is the largest, with £841mn in assets, while International Biotechnology’s (IBT) long-term record looks better, with nearly 245 per cent returned in the decade to 2 July.
Gordon Smith, head of fund research at Killik and Co, says he expects M&A to pick up momentum in the next few years. He likes International Biotechnology. “The management team has repositioned the portfolio towards smaller and mid-cap companies, and this has borne fruit,” he says. Eight companies in the portfolio have announced takeovers this year so far, which shows “the opportunity in M&A we see from the sector”, he adds.
Baker Steel Resources (BSRT) is next on the list, a small mining trust that isn’t for the faint of heart. The portfolio is incredibly concentrated, with the top 10 holdings making up nearly 90 per cent of the total, and spans both listed and unlisted companies. It invests across a range of natural resources, with tungsten (23 per cent), coking coal (20 per cent) and cement (18 per cent) the biggest exposures in the portfolio. Read our smaller companies’ analysis of Baker Steel here
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Emerging markets and tech
It has been a strong year for emerging markets, so it’s no surprise that two funds make it into the list. Much of the story has been about chipmakers and how they are benefiting from AI spending, starting with Taiwanese giant TSMC (TW:2330), by far the largest listed company in the region.
As at the end of May, Fidelity Emerging Markets (FEML) had just shy of 16 per cent of the portfolio in TSMC and 60 per cent in tech stocks – a change compared with just a year ago, when its largest exposure was financials. The trust uses gearing liberally, helping it to be a top performer this year, as emerging markets witnessed a strong bull market. The managers look for structural growth stories and can also take short positions.
Managed by Baillie Gifford, Pacific Horizon (PHI) is another that skyrocketed in 2020-21 and then struggled against higher interest rates. But with a third of the portfolio invested in China and around 30 per cent in semiconductor stocks, it has enjoyed a recovery in the past year.
Pacific Horizon’s managers look for the fastest-growing companies in Asia. “These investments are expected to deliver superior earnings growth over the long term, and the manager has found that this trend persists irrespective of the starting valuation,” Investec analysts explain. “The process focuses on three persistent inefficiencies: under-appreciated growth duration; under-appreciated growth pace; and under-appreciated growth surprise.”
Finally, Polar Capital Technology (PCT) is one of two trusts focused on tech stocks, together with Allianz Technology (ATT). The sector has, of course, performed very strongly thanks to AI. So far this year, Polar Capital trust has beaten its Allianz rival by around 10 percentage points. While some top holdings are similar, Polar Capital Technology is less focused on US stocks and more diversified, which has worked in its favour.