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UK investment trust review – is the UK undervalued?

After a strong start to 2021, we take a look at where in the UK’s done well, which sectors are coping best and how some popular investment trusts have performed.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

In 2020 lots of companies cut their dividends in the face of uncertain demand and the UK was disproportionately affected compared with other global markets. That’s because UK companies have historically paid higher dividends. But things are starting to look a little rosier.

The recovery from the depths of the pandemic signalled an improving outlook for company dividends. The rapid rollout of the Covid-19 vaccine programme was a metaphoric and literal shot in the arm for confidence too. This has translated to a strong start to the year for the UK stock market.

The UK stock market’s grown 5.2% so far this year to the end of March 2021, outperforming the broader global market by 1.1%. Over 12 months the outperformance is a more meaningful 6.7%. But this doesn’t hide the fact that over the past 10 years UK shares have lagged global returns by over 120%. Remember though, past performance isn’t a guide to the future. These are also short time periods, and there’s no guarantee this will continue.

Not all UK companies performed the same

Medium and small sized companies that rely on a strong economy did better than bigger companies that tend to make money come rain or shine. The largest companies often make more money overseas, while mid and small sized companies tend to earn more from home. If investors think the UK will recover before other countries, this could be the reason for this stronger showing.

Value investing has also started outperforming. This is where investors favour companies whose share prices are trading below what they think they’re actually worth, often with high dividend yields, rather than those growing quickly. The UK has a bias towards this type of company, so this trend could support UK companies if it continues.

The UK market is on a significant discount to many other regional and global peers. This means investors might pay less to buy a UK company than a similar US one for example, especially since the 2016 EU referendum.

The UK’s home to lots of well-managed and good-quality companies with high standards of corporate governance. We could see a shift to more investors thinking the UK market discount isn’t warranted, and that could help the performance of UK companies although there is no guarantee when or if we will see this take place.

How can you invest in UK companies?

There are lots of ways to access UK shares. You can buy them individually or you can buy a number of shares at the same time through an investment trust.

What is an investment trust?

Investment trusts are listed equities and trade on exchanges between buyers and sellers like other shares. The share price can often differ from the net asset value (NAV) which is different to funds which will have a single daily price calculated by the provider. If the current share price is above the NAV, the investment trust is said to be trading at a premium – it costs more to buy the shares than the underlying investments are worth. When the share price is below the NAV, this is known as trading at a discount. Investment trusts are run by a manager, alongside oversight from a board of directors.

Investment trusts can be a good way to diversify your portfolio as it’ll invest in lots of different companies. They’re also able to build up revenue reserves which involves holding back some income during the good times, so it can be used to top up dividends during the bad. This was particularly helpful when dividends dropped in 2020.

Investment trusts can also be a good way to invest in smaller companies. These can be higher risk and harder to trade at times, but investment trust managers aren’t forced to sell or buy companies to meet redemptions or purchases, unlike funds. Finally, gearing (being able to borrow money) can help returns when markets rise, but the reverse is also true.

This article isn’t personal advice. Investments can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment or course of action is right for you, seek financial advice.

Investing in the investment trusts mentioned in this article isn’t right for everyone. Investors should only invest if the investment’s objectives are aligned with their own and they understand the specific risks. Investors should make sure any new investment forms part of a diversified portfolio. You can find out more about a trust’s risks in the key investor information and annual reports.

UK Equity Income

In the first three months of 2021, the Association of Investment Companies (AIC) UK Smaller Companies and UK Equity Income sectors returned 9.4% and 7.2% respectively.

Merchants Trust returned 12.7 %* in share price terms and Edinburgh Investment Trust returned 11.1%*. These trusts invest in a range of well-known UK companies. They benefitted from holdings in cyclical stocks (those whose health is linked to the economy) like financials, consumer cyclicals and basic materials.

Finsbury Growth & Income Trust and Troy Income & Growth Trust were weaker with share price returns of -1.5%* and -2.3 %*. They focus on highly dependable companies which can perform whatever the weather. These can include highly valued consumer staples like Unilever and Reckitt Benckiser. This held back recent performance although longer-term performance is still strong. Investors have become preoccupied with the exit from lockdown looking beyond these ‘steady eddies’, but we think both trusts could have merit in the long term.

Annual percentage growth
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
Edinburgh Investment Trust 11.2% -6.7% 4.6% -29.4% 46.4%
Finsbury Growth & Income Trust 17.0% 10.4% 12.7% -6.6% 15.9%
Merchants Trust 22.3% 7.5% 6.4% -20.4% 44.1%
Troy Income & Growth Trust 13.2% -3.1% 9.5% -7.1% 4.5%
FTSE All-Share 22.0% 1.2% 6.4% -18.5% 26.7%

Past performance is not a guide to the future. Source:Lipper IM* to 31/03/2021


FIND OUT MORE ABOUT EDINBURGH INVESTMENT TRUST INCLUDING CHARGES

EDINBURGH INVESTMENT TRUST KEY INVESTOR INFORMATION


FIND OUT MORE ABOUT FINSBURY GROWTH & INCOME TRUST INCLUDING CHARGES

FINSBURY GROWTH & INCOME TRUST KEY INVESTOR INFORMATION


FIND OUT MORE ABOUT MERCHANTS TRUST INCLUDING CHARGES

MERCHANTS TRUST KEY INVESTOR INFORMATION


FIND OUT MORE ABOUT TROY INCOME & GROWTH TRUST INCLUDING CHARGES

TROY INCOME & GROWTH TRUST KEY INVESTOR INFORMATION


UK All Companies

In the UK All Companies sector, Fidelity Special Values recovered strongly (+10.7 %*) in the first quarter of the year. It invests specifically for recovery or in undervalued companies, including higher risk mid and small sized ones. It has holdings in financials, industrials and consumer services that could all benefit if there’s a pickup in confidence.

Mercantile Investment Trust returned 4.3 %*. This was lower than its Net Asset Value return of 8.5 %* as its discount widened. It has over 40% invested in consumer goods & services like Bellway, Countryside and Dunelm. These could perform well as UK consumers make up for lost time if lockdowns are relaxed. The trust is also focused on higher risk mid and small sized companies so could see a boost if UK growth is stronger.

Annual percentage growth
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
Fidelity Special Values 21.1% 19.3% 0.1% -31.5% 62.5%
Mercanitle Investment Trust 12.6% 16.4% 0.2% -10.2% 52.1%
FTSE All-Share 22.0% 1.2% 6.4% -18.5% 26.7%

Past performance is not a guide to the future. Source:Lipper IM* to 31/03/2021


FIND OUT MORE ABOUT FIDELITY SPECIAL VALUES INCLUDING CHARGES

FIDELITY SPECIAL VALUES KEY INVESTOR INFORMATION


FIND OUT MORE ABOUT MERCANTILE INVESTMENT TRUST INCLUDING CHARGES

MERCANTILE KEY INVESTOR INFORMATION


UK Smaller Companies

Finally, within the AIC Smaller Companies sector Henderson Smaller Companies returned 11.3 %*. It has around 40% invested in cyclical shares like Bellway, Impax and Paragon and outperformed Standard Life UK Smaller Companies (-5.3 %)*.

Both trusts have exceptional long-term records and could be good smaller UK companies trusts within a broader diversified portfolio. Smaller companies are higher risk though and periods of ups and downs should be expected.

Annual percentage growth
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
Henderson Smaller Companies Investment Trust 20.0% 22.8% 1.5% -15.4% 73.9%
Standard Life UK Smaller Companies Trust 18.5% 28.3% -7.8% -1.1% 38.9%
FTSE Small Cap ex Investment Trust 19.7% 2.2% -3.1% -24.4% 74.9%

Past performance is not a guide to the future. Source:Lipper IM* to 31/03/2021


FIND OUT MORE ABOUT HENDERSON SMALLER COMPANIES INVESTMENT TRUST INCLUDING CHARGES

HENDERSON SMALLER COMPANIES INVESTMENT TRUST KEY INVESTOR INFORMATION


FIND OUT MORE ABOUT STANDARD LIFE UK SMALLER COMPANIES TRUST INCLUDING CHARGES

STANDARD LIFE UK SMALLER COMPANIES TRUST KEY INVESTOR INFORMATION


Read our latest investment trust updates

The author has a holding in The Mercantile Investment Trust PLC.

The Mercantile Investment Trust PLC has a holding in Hargreaves Lansdown PLC shares.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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