Why Brexit blues might mean UK investment trusts are a bargain - J.P. Morgan Asset Management

Why Brexit blues might mean UK investment trusts are a bargain

Contributor Ian Cowie
Karen Ward

Short-term uncertainty about the outcome of Brexit may create opportunities for investors seeking income and gains over the medium to long term.

Shares in several investment trusts focused on the United Kingdom which have a history of raising dividends and delivering capital growth, can now be bought for less than their net asset value (NAV). While share prices and NAV can fall without warning, widespread anxiety about Brexit might mean bargains for the brave.

Fears about Britain’s future outside the European Union have caused many fund managers to shun the United Kingdom. Independent statistician Morningstar reports that the average allocation to UK equities has halved during the past decade, from 20% of the typical investment trust in 2008 to less than 10% now. 1

Nor is it just institutional investors who are allocating assets overseas. Many individual investors are following the trend. Chris Cummings, Head of the Investment Association, a fund managers’ trade body, said: “The UK is firmly out of favour amid Brexit uncertainty, with outflows exceeding £3.5bn since the beginning of this year.2 "

But some shrewd asset allocators believe that there are reasons to be optimistic despite the pessimism of crowds. Callum Abbot, co-manager of the £440m JPMorgan Claverhouse Investment Trust plc, said: “The UK equity market is unloved and cheap. If Brexit proves more benign than widely expected, there is potential for reallocation to UK equities.”

While the future remains uncertain, the history of JPMorgan Claverhouse Investment Trust plc is impressive. This UK equity income investment trust has increased its dividends for 45 consecutive years. So shareholders received rising income every year throughout a period that included industrial unrest in the 1970s and 1980s, Britain’s exit from the Exchange Rate Mechanism - a forerunner of the euro - and the global credit crisis that began in 2008.

This trust currently yields 4% and its shares trade at a 1% discount to its NAV. Total share price returns over the last five and 10 years are 40.1% and 239% respectively.

Investors whose priority is capital growth might prefer The Mercantile Investment Trust. This £1.9bn giant in the UK All Companies sector focuses on identifying tomorrow’s market leaders, by targeting UK companies outside the FTSE 100 that have significant room for growth and are not recognised by other investors.

Mercantile’s shares can currently be bought for about 10% less than their NAV. This trust currently yields 3% and the total share price return over the last five and 10 years was 48.2% and 361.5% respectively.

Medium-sized UK companies listed on the FTSE 250 index are the main focus of JPMorgan Mid Cap Investment Trust plc. Active stock selection within this domestic theme delivered total share price returns of 63.4% and 438.4% over the last five and 10 years, respectively. JPMorgan Mid Cap plc currently offers a dividend yield of 2.8% and its shares trade at a 6.8% discount to NAV.

Not every acorn grows into an oak but investors seeking diversified exposure to corporate tiddlers in pursuit of capital growth may consider JPMorgan Smaller Companies Investment Trust plc. It aims to identify fast growing, innovative British businesses and has delivered total share price returns of 44% and 421.3% over the last five and 10 years. This trust, yields 2.6% dividend income and trades at a 14% discount to NAV.

Investors who feel fearful about the future may find that history provides some reasons to be cheerful. Comparison of returns from cash and shares reflecting the changing composition of the London Stock Exchange since 1899 suggests a warning for short-term speculators and some reassurance for medium to long-term investors.

For example, if you had held British shares for only two consecutive years at any stage during that period of more than a century, the historic probability of achieving a higher return than cash was 68%. In other words, the probability of shares beating cash was little better than two-in-three.

Put the other way round, there was a near one-in-three chance of losing money. Many people might regard that as quite a substantial risk for their hard-earned savings.

Over the long term, investors who could ride out short-term storms on the stock market and remain invested for 10 years had a 91% probability of beating bank and building society deposits.

Bear in mind the period under review in this analysis3 included two World Wars and the Great Depression, not to mention a General Strike, three-day-week and a couple of oil crises.

Past woes can put our current worries in perspective. So, while the short term outlook today remains highly uncertain, history may offer some comfort to medium and long term investors in British shares.

Share price quarterly rolling 12 month performance as at 30/09/2018
Trust Benchmark 2013/2014 2014/2015 2015/2016 2016/2017 2017/2018
JPMorgan Smaller Companies Investment Trust plc FTSE Small Cap (ex Inv Companies) (£) -2.11% 21.21% -7.82% 23.54% 26.19%
JPMorgan Claverhouse Investment Trust plc FTSE All-Share Index (£) 4.73% 1.88% 7.87% 20.25% 16.09%
JPMorgan Mid Cap Investment Trust plc FTSE 250 Index (ex Investment Trusts) (£) 12.05% 37.97% 0.44% 18.15% 8.24%
The Mercantile Investment Trust plc FTSE AllShare (ex FTSE 100, ex Inv Companies) (£) 5.72% 21.68% 1.89% 24.03% 8.08%

Share price performance figures are calculated on a mid market basis in GBP with income reinvested on the exdividend date. Performance source: J.P. Morgan Asset Management as at 30 September 2018. Past performance is not a reliable indicator of current and future performance.

  • External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
  • This trust may utilise gearing (borrowing) which will exaggerate market movements both up and down.
  • This trust may also invest in smaller companies which may increase its risk profile.
  • The share price may trade at a discount to the Net Asset Value of the company.

1Source: Morningstar as at 20 August 2018

2Source: The Investment Association, as at 1 November 2018

3 Source Barclays Equity Gilt Study, page 93

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