Up 72% or down 34%: a wild month for specialist investment trusts

Investors are often told that the minimum holding period for funds – whether actively managed or passive – is five years. That period is viewed as an ample amount of time to ride the inevitable ebbs and flows that come with stock market investing.

However, the most adventurous strategies can, on occasion, shoot the lights out or plummet over very short time periods.

• Invest with ii: Invest in Investment Trusts | Top UK Shares | Interactive investor Offers

Examples of specialist funds and investment trusts include those invested in a single-country emerging market, such as China, India and Vietnam. Other specialists focus on a particular niche within a certain asset class, theme or sector.

The key thing to remember with such approaches is that performance can quickly blow hot and cold. The performance of specialist investment trusts in September proves this point. As the table below shows, the best-performing specialist returned 72%, while the worst lost 34%.

Specialist risers in September

Specialist fallers in September

Source: FE Fundinfo. Data from 1 September 2023 to 30 September 2023.

Round Hill, which specialises in music royalties, saw its share price soar on the back of accepting a takeover.  

In contrast, bottom of the pile was digital infrastructure specialist Digital 9. Its share price plunge was in response to the 6p dividend target being scrapped for its 2023 financial year, as well as its second-quarter dividend not being declared. The scrapping of the dividend target was particularly punished given that its board had said in mid-July that the policy would remain in place.

• Small investments trusts: which to back, and which to avoid
• Tips and lessons from one of our On the Money listeners

Commenting on the performance of specialist investment trusts last month, Ben Yearsley, a director at Shore Financial Planning, said: “It wasn’t a great month for specialist investment trusts, with Digital 9 having a shocker after abandoning the dividend and effectively saying they were running short of cash.”

He adds that Civitas and Home REIT Ord (LSE:HOME) are other examples of specialist trusts that have turned sour. 

Yearsley continued: “Specialist trusts could do with better corporate governance. Once the darling of the trust world, it feels like many specialist trusts have a lot of work to do to regain investors’ interest.”

It also serves as a reminder that while investment trusts have plenty of attractions for private investors they tend to be more volatile than open-ended funds. Unlike open-ended funds, the professionals running investment trusts are not forced sellers during periods of heavy investor selling due to them having a fixed pool of capital. However, the downside is that the market can take a dim view of the outlook and force down share prices.

• Concentrated portfolios: 11 funds and trusts favoured by the pros
• Fund Spotlight: former star trust now looks very cheap

The reality is that every investment has an element of risk and there are no guarantees a return will be achieved. While most people think about risk as losing money, academic finance defines risk as volatility. In the simplest terms, this means how much the price of an investment fluctuates over a given period of time.

It is important that investors have an understanding of where the funds and/or trusts they hold sit on the risk spectrum. At one end are cautious strategies, such as wealth preservation trusts, while the other is occupied by those that are adventurously invested, such as those specialising in a certain area or niche.