Ian Cowie: will first-half losers be the winners of tomorrow?

Our columnist sorts through the best and worst trusts of 2020 so far and wonders about opportunities for brave contrarians.

The coronavirus pandemic has polarised investment trusts’ performance since the start of this year, with some shares soaring and others slumping. Now new research for interactive investor by the Association of Investment Companies (AIC) sorts the winners from the losers.

Hedge funds, that can profit from selling shares whose price they expect to fall, are the surprise top-performing sector among more than 300 AIC investment trusts during the first half of this year, delivering average returns of 26%. Less surprisingly, Leasing - a sector dominated by aircraft that are currently grounded by the coronavirus crisis - did worst, with share prices collapsing by an average of 48%.

Within those two extremes, several other sectors experienced rising revenues or shrinking sales. Technology & Media and Biotechnology & Healthcare trusts ranked second and third best-performing sectors, with average returns of 25% and 14% respectively. At the other end of the spectrum, UK Smaller Companies and UK All Companies came second and third from bottom, with share price shrinkage of 28% and 27%.

Tech was boosted by working from home, with more people spending more time and money online, while healthcare is the classic beneficiary of an ill wind or virus. Investors bought heavily into both sectors while shunning British funds where political uncertainty about how Brexit will work in practice remains a worry for many. Property-Debt and Property-UK Commercial were other unloved sectors, both suffering share price shrinkage of 19% in the first half, as shuttered shops and rent strikes seem to signpost the end of the high street.

Never mind the sector averages, though, which shares did best or worst? Once again, the AIC research contains a mixture of high profile and little-known investment trusts among the leaders and the laggards.

Baillie Gifford US Growth (LSE:USA) (stock market ticker: USA) was the overall winner in the first half of 2020, with total returns of 49% in the six months to Monday this week from this star of the North America sector. This trust, with total assets of £547 million, currently trades at a 6% premium to net asset value (NAV).

BH Macro (LSE:BHMU) the Brevan Howard US $ hedge fund was only a whisker behind with total returns of 48%, closely followed by Pacific Horizon (LSE:PHI) - another Baillie Gifford trust - in the Pacific sector with 47%. BHMU currently trades at a 14% discount to NAV while PHI is priced at a 5% discount.

Scottish Mortgage (LSE:SMT), yet another tech-heavy Baillie Gifford giant, ranked fourth in the half-year with 38%, while Biotech Growth (LSE:BIOG) came fifth with 34%. SMT trades at a 2.7% premium to NAV while BIOG trades at a 2.1% discount.

Among the losers, all five of the worst-performers during the first half of the year saw their share prices shrink by more than half. They are DP Aircraft (LSE:DPA) down 80%; SQN Asset Finance Income (LSE:SQN) down 59%; Amedeo Air Four Plus (LSE:AA4) down 54% - all three in the ‘Leasing’ sector - with British & American (LSE:BAF) an UK Equity Income trust, and Electra Private Equity (LSE:ELTA) a Private Equity trust, both down nearly 54%.

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Annabel Brodie-Smith, a director of the AIC, told me: “While the resilient performance of technology and healthcare stocks during the pandemic has been widely discussed, the dramatic rise of hedge funds to be the best performing investment company sector over the last six months has not received much attention.

“Investment companies in this sector have achieved exactly what they set out to do, namely preserving capital during tough times and providing diversification to portfolios by investing in long and short equity positions as well as other more esoteric assets.”

But it’s only fair to point out that hedgies don’t come cheap, with average ongoing charges in this sector of 2.68%. Nor do high fees always guarantee good performance. The average total return from investment trusts in the hedge fund sector over the last five years was just 6.4%; you could have done better than that at the Post Office.

However, the past is not necessarily a guide to the future and brave contrarians may find some 2020 first-half losers are the winners of tomorrow. Brodie-Smith pointed out: “Following a strong post-election bounce, UK equities were hit hard in the coronavirus sell-off and uncertainty over Brexit persists.

“Investor sentiment towards the UK has suffered but recent market movements suggest that bargain hunters have been willing to enter the market.”

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If the coronavirus goes away as suddenly and mysteriously as it arrived, the global economy could enjoy a V-shaped recovery in the second half of 2020. If this modern plague persists, then we might see something more like a K-shaped recovery, with technology and healthcare continuing to rise while leasing and property plunge.

Ian Cowie does not hold shares in any of the investment trusts mentioned.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.