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Written by: Darius McDermott
23/12/2021
I’ve put a crystal ball on my Christmas list, as I will freely admit I’m befuddled on the outlook for equity, bond, or even supermarkets next year.

In years gone by, I’d make an educated guess by looking at the global economic cycle – the path of growth, jobs numbers, and inflation – and valuations of markets. But there are so many uncertainties in the world at the moment it’s almost impossible to make a call.

The most recent is Omicron and the impact of Plan B (it’s more like plan T!) that means we are all being asked to work from home until the end of January. Christmas has not been cancelled but who knows what will happen in the New Year.

The only thing I can say with any certainty is that we are likely to be in for a period of volatility in global stock markets. But with interest rates still so low, holding savings in cash is still unattractive, so I’d strongly argue that investing is 100% the way to go.

But how to invest? The truth is you need flexibility in times like these. I’ve talked about investment trusts on this forum before, but I feel they do offer some additional attractions in this climate. As with funds, they can invest in any sector or geography, but with a number of differences.

Investment Trusts – the key differences explained

Closed ended structure – investment trusts are closed-ended. This means if you try to buy a trust’s shares after it launches you can only do so if an existing investor wants to sell theirs.

Contrast this with an open-ended fund, where the manager makes it possible to invest by creating new units and then invests this new money. However, when investors want to sell in an open-ended fund, a manager may have to sell an investment(s) in order to meet redemptions.

When you sell shares of a trust, the manager doesn’t have to sell any assets, but you have to find someone to buy the shares from you – that could be essential should we see another sell-off early in 2022.

Market sentiment – as an investment trust is a company, market sentiment can also dictate its share price. This may move above or below the value of the assets, known as the Net Asset Value (NAV).

When it is above those assets it trades at a premium, while below means it is a trading at a discount. But be warned, sentiment is not always correct – a trust trading at a discount could be an opportunity, while another at a premium could be overpriced.

Borrowing to invest more – this is known as gearing and is often used when a manager sees a potential rise in a certain stock or sector. If that stock or sector rises in value it can boost returns for the trust, but should they fall, it can easily make the losses greater – it means the trust carries extra risk.

Why does it matter now? The truth is that these extra tools are always useful, but the uncertainties of the next 12 months undoubtedly make them even more attractive in my eyes as when there are challenges there are also opportunities.

Below are five investment trusts to consider for 2022.

UK equities – City of London

UK equities remain one of the most unloved parts of the world, as the overhang of Brexit and the uncertainty of the pandemic have hit particularly hard on sentiment. But it is still home of many good dividend payers.

City of London Investment Trust is one of the longest-running investment trusts in the UK. It invests predominantly in larger UK companies and has increased its dividend payment every year for the past 54 years. It is also very good value with annual charges of just 0.325% per annum.

European equities – European Opportunities

Europe is almost as unloved as the UK but is home to many big brand businesses. This trust is a high conviction portfolio of mainly medium and larger companies.

The manager looks for evidence of successful, proven business models being implemented by quality management teams. Firms benefiting from economic tailwinds and in strong positions within their industries are preferred.

Japanese equities – Baillie Gifford Shin Nippon

The Baillie Gifford Shin Nippon trust has an exceptional track record yet is currently trading at a slight discount which makes it attractive for long-term investors*. Shin Nippon means ‘new Japan’ and this trust focuses on emerging or disrupted sectors, where manager Praveen Kumar sees innovative growth opportunities.

Chinese equities – JPM China Growth & Income

China is arguably the market which has let investors down most in 2021 as government intervention created significant volatility, with the market incurring significant falls as a result.

But the stock market now looks cheap and the long-term story behind China’s growth remains as strong as ever. The JPMorgan China Growth & Income trust is a high conviction portfolio of 60 to 80 stocks with a focus on higher quality companies. Performance has been stellar, returning almost 200 per cent in five years**.

Global equities – Mid Wynd International

Those looking for diversity, may prefer a global trust. A consistent outperformer, The Mid Wynd International Investment Trust is a core option for any investor looking for a conservatively managed offering that taps into a number of global trends like automation, online services and healthcare costs).

 

*Source: FE Analytics, figures from 9 December 2016 to 9 December 2021

**Source: FE Analytics, total returns in pounds sterling from 9 December 2016 to 9 December 2021

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.

Darius McDermott is managing director of Chelsea Financial Services and FundCalibre 

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