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Investment Trust Review: Best and worst performing sectors 2016

Investment Trust Review: Best and worst performing sectors 2016

27 January 2017

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

2016 was a year of surprises. From the UK’s vote to leave the European Union to Donald Trump’s victory as the next US president, the year ended in a way many of us did not predict. Wider economic and political events altered the investment landscape and even seasoned investors were caught off guard.

Many of 2015’s weakest-performing investment trusts, including those in the Latin American and resources sectors, topped the performance tables in 2016, while poorer-performing sectors, such as UK Smaller Companies, prospered in 2015 but languished last year. The value of investments can fall as well as rise, so investors could get back less than they invest. As ever please remember past performance is not a guide to future returns.

The winners

Following a torrid year the share prices of resources and mining companies staged a recovery in 2016, boosted by a rise in commodity prices and earnings forecasts. BlackRock World Mining Trust plc, for instance, delivered a return of 100.6%.

Our analysis suggests the shares of mining and resources businesses continue to trade on depressed valuations despite the recent rebound in prices. Many of these businesses have been working hard to cut costs and hired new management teams in an effort to turnaround performance, while any sustained rebound in commodity prices could see share prices rise further. There is, however, plenty of work to be done and the share prices of these companies are likely to remain volatile.

Top 5 investment trust sectors

Sector Return (%)
Country Specialists: Europe 87.4
Commodities & Natural Resources 72.5
Latin America 52.0
Eastern Europe 50.6
North America 42.6

Past performance is not a guide to the future. Please see bottom 5 of article for 5 year performance.

Source: Lipper IM, correct at 31/12/2016

The rebound in commodity prices, including oil, benefited the performance of specialist emerging markets investment trusts that invest in resource-rich countries. JPMorgan Russian Securities, for example, rose 87.4% over the year. The strength of the Russian ruble against UK’s sterling also enhanced returns for UK-based investors.

Given its vast store of natural resources, Latin American markets also witnessed improved performance. Investor sentiment towards the region improved further following the impeachment of former President Dilma Rousseff and the subsequent appointment of a more business-friendly leader in Michel Temer. Aberdeen Latin American Income Fund and BlackRock Latin American Investment Trust rose 58.1% and 45.7% respectively over the year.

We feel the long-term prospects for Latin American markets look promising. Industrialisation, urbanisation and an expanding middle class are driving growth in domestic demand, meaning its youthful and burgeoning workforce expect to enjoy greater wage growth and disposable income. Our analysis also suggests these markets continue to look good value. That said, the region continues to face economic and political challenges, so shorter-term performance is likely to remain volatile.

North American investment trusts benefited from US dollar strength against weaker sterling. Share prices also made modest gains amid hopes President-elect Donald Trump would introduce a pro-business agenda. The US market has performed exceptionally well since the 2008 financial crisis. In our view it has started to look overvalued, although some commentators believe the potential for the country’s world-class technology companies to increase profits could justify share prices climbing higher.

The losers

In contrast, the UK’s vote to leave the EU negatively impacted investment trusts investing in the UK and Europe. Those investing in smaller companies were worst affected; in the aftermath of the vote, small and medium-sized companies, which are more exposed to the health of the UK economy than their more internationally-exposed larger counterparts, were shunned. A number of trusts, such as Henderson Smaller Companies Investment Trust and Standard Life UK Smaller Companies Trust, fell in value over the course of the year, although the sector as a whole made a modest gain.

Over the longer term we feel smaller companies offer excellent capital growth potential, although some exposure to larger companies should also be considered as part of a diversified portfolio. This could help dampen some of the volatility associated with higher risk smaller company investing. As a whole we believe the UK is home to many great companies that have stood the test of time. We believe investors in the stock market will ultimately be rewarded over the long term, although there are no guarantees.

Bottom 5 investment trust sectors

Sector Return (%)
UK Smaller Companies 3.8
UK Property 4.2
Europe 4.8
UK All Companies 5.4
Property Securities 5.9

Past performance is not a guide to the future. Please see bottom of article for 5 year performance.

Source: Lipper IM, correct at 31/12/2016

The EU referendum also led to concerns over the prospects for the UK property market. The decision to leave the EU was expected to have a negative impact on UK economic growth and the commercial property sector in particular, which includes retail, office and industrial properties, is affected by the strength of the UK economy. The sector has a whole delivered a positive return, however, such as TR Property Investment Trust plc, which delivered a total return of 2.3%.

Property investment trusts have proved popular in recent years, especially with income-seeking investors in an environment where ultra-low interest rates have driven down the income available on cash deposit (yields are variable and not guaranteed). This has driven asset prices higher and, therefore, in the near term a greater portion of returns could be expected to come from income rather than capital growth. We feel property-related investments could be used to diversify a more traditional equity income portfolio.

5 Year performance of investments and sectors highlighted in the article.

Annual Percentage Growth
Dec 11 -
Dec 12
Dec 12 -
Dec 13
Dec 13 -
Dec 14
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Country Spec Europe -0.7 38.4 -31 -55 87.4
Europe 27.8 32.9 5.9 12.2 4.8
European Emerging Markets 16.3 3.9 -29.1 1.8 50.6
Latin America 5.2 -17.4 -6.5 -26.7 52
North America 7.6 20.5 11.3 -5.5 42.6
Property Direct - UK -12.6 79.6 5.9 5.4 4.2
Property Securities 33.9 17 21.7 10.4 5.9
Spec: Comdts & Nat Res -9.9 -33 -28.6 -38.9 72.5
All Companies 19.6 30.5 -1.1 8.2 5.4
UK Smaller Companies 30.4 47.6 -3.3 24.3 3.8

Past performance is not a guide to the future. Table listed in alphabetical order.

Source: Lipper IM, correct at 31/12/2016

Annual Percentage Growth
Dec 11 -
Dec 12
Dec 12 -
Dec 13
Dec 13 -
Dec 14
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Aberdeen Latin American Income Fund Ld 15.6 -21.9 -9.3 -27.2 58.1
BlackRock Latin American Investment Trust PLC 1.6 -13.8 -4 -26.6 45.7
BlackRock World Mining Trust PLC -4.1 -17.5 -30.4 -37 100.6
Henderson Smaller Companies Investment Trust PLC 47.9 55.7 -0.5 27.6 -2.3
JPMorgan Russian Securities PLC 9.7 3.7 -46.6 12.4 87.4
Standard Life UK Smaller Companies Trust PLC 32.6 41.3 -15.1 38.6 -3.5
TR Property Investment Trust PLC 30.9 35.7 29.3 8.8 2.3

Past performance is not a guide to the future. Table listed in alphabetical order.

Source: Lipper IM, correct at 31/12/2016

Further information on investment trusts and their risks can be found in our Investment Trust Research Centre

This article is not personal advice. If you are at all unsure of the suitability of an investment for your circumstances please seek advice.

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Investment notes
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.
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