Market volatility is characterised by significant and often rapid fluctuations in asset prices, heightened uncertainty among investors, and an increased level of anxiety regarding investment portfolios.
These periods can be triggered by a multitude of factors, including geopolitical events, economic policy changes, or unexpected corporate news. In such an environment, investors often seek strategies and investment vehicles that can potentially offer a degree of resilience or even opportunities for growth.
Investment trusts, as a distinct category of collective investment vehicles, possess several unique structural features and operational capabilities that may provide certain advantages when navigating the turbulent waters of volatile markets.
Understanding investment trusts
Before exploring their role in volatile markets, it is helpful to understand what investment trusts are and how they function.
Investment trusts are defined as public limited companies (PLCs) that are listed on stock exchanges, such as the London Stock Exchange. This corporate structure means that they have a board of directors who are elected by and accountable to the shareholders, a feature that distinguishes them from open-ended funds or ETFs.
As a closed-ended fund, an investment trust is a collective investment vehicle with the primary objective of generating profit for its shareholders through investments in a diversified portfolio of shares or a variety of asset classes.
Investment trusts have a fixed number of shares. These shares are traded on a stock exchange, like any other publicly listed company. This means that the fund manager does not have to buy or sell assets to meet investor redemptions or inflows.
Investment trusts are actively managed, which can be invaluable in volatile markets as managers are able to navigate the turbulent conditions, identify opportunities, and mitigate risks.
Investments trusts also have an added layer of custody with the independent board of directors overseeing the fund manager, ensuring shareholder interest is upheld.
Shares in investment trusts are bought and sold between investors on the stock market, much like the shares of any other publicly listed company. This market-driven pricing mechanism can lead to investment trusts trading at a price that is either higher or lower than the value of the underlying assets they hold, known as the net asset value.
When the share price is below the NAV, the trust is said to be trading at a discount, and when it is above, it is trading at a premium. This discount/premium dynamic can present both potential opportunities and risks for investors, especially in volatile markets.
Advantages of investment trusts in volatile markets
The closed-ended structure of investment trusts allows fund managers to take a long-term view. They are not forced to sell assets to meet redemptions during market downturns. This means they can focus on the underlying value of the investments and make decisions that are in the best long-term interests of shareholders.
In volatile markets, this allows managers to ride out short-term fluctuations and capitalise on undervalued assets.
Investment trusts can invest in a wider range of assets than open-ended funds, including illiquid assets such as property, private equity, and infrastructure. These assets can provide diversification benefits and may be less correlated with the broader market, which can help to cushion the impact of volatility.