After the excellent returns of 2016 and 2017, most equity investors steeled themselves for a difficult 2018, as the course of profitable investment never runs smoothly. And so it proved, with the FTSE All Share index losing 9.5% (including income). The MSCI World index, protected by the better performance of Wall Street and by the weakness of sterling, lost just 2.5%. A typical British investor, with less exposure to the US than the MSCI’s 56% and more to the UK and smaller companies, will be down more than 5%; perhaps a bit less if the portfolio includes a good allocation to government bonds, alternative funds (such as infrastructure), or cash.
Still, three-year returns remain good: the average return of investment trusts in the global sector is 42%, while the worst performer returned 18%. Investors may have been shocked by double-digit percentage declines in value in the last quarter of 2018, and will be nervous about the outlook for 2019, but on any multi-year perspective, the stockmarket has been a profitable place to invest.
“Lower-risk” strategies
However, in recent years many investors, scarred by the 2008 financial crisis, have been persuaded to adopt “lower-risk” strategies. They invested in funds that missed out on much of the 2016-2017 upside in the expectation that they would be cushioned in more turbulent times. The basic idea behind these lower-risk funds was to sacrifice some upside in the good times but temper the downside in the bad times. Ideally, the long-term return would be the same, but the ride would be much smoother, especially in a volatile environment when absolute performance might be modest but would compare very favourably with the losses being suffered by conventional terms.
Funds with these strategies were declared to be seeking “absolute returns”, as opposed to returns relative to the market indices. As you might expect, this approach found particular favour among trustees of pension funds and charities and the consultants who advise them. These investors are entrusted with looking after other people’s money, and hence tend to be more focused on short-term risk, not least to their reputations, than on longer-term returns. Last year provided an opportunity for these funds to prove themselves but, unfortunately, many have failed the test.
Investment trusts with the “absolute-return” approach are grouped together in the “flexible investment” sector and have mostly performed satisfactorily. Their average 2018 return of -4.6% was similar to the average return in the global sector, but the three-year return, at 27%, was much lower. However, their performance in the final quarter of -5% was much better, indicating that though they lagged badly early in the year, their caution was later vindicated. Caledonia Investments (LSE: CLDN), RIT Capital Partners (LSE: RCP) and Capital Gearing (LSE: CGT) were the best performers, with positive returns for the year, while Ruffer Investment (LSE: RICA), with dismal but still positive three- and five-year returns, was the dog, losing investors 11%. But “at least with Ruffer, as with Personal Assets Trust (LSE: PNL) or Capital Gearing, you can understand why they have done well or badly”, says Mark Dampier of Hargreaves Lansdown. Ruffer’s November fact sheet shows an allocation to index-linked bonds of more than 40%, a chunky 12% in Japanese equities, 7.5% in gold and gold equities, but 72% in sterling, which suggests currency hedging was expensive for Ruffer in 2018.