The coronavirus poses the biggest threat to global health and wealth in living memory but investment companies have helped savers and investors minimise its risks so far. On average, these closed-ended funds have avoided nearly two-thirds of the losses suffered by other shareholders this year.
While the FTSE All Share index, a broad measure of the London market, has lost 15% of its value since the start of 2020, the FTSE Equity Investment Instruments index, a benchmark of investment companies in the All Share, has fallen by only 5.1% at the time of writing. The explanation is largely based on the most fundamental way to diminish the danger inherent in investment; diversification.
Pooled funds can spread individual investors’ money over dozens of different underlying companies, countries and currencies to reduce our vulnerability to setbacks or failure at any one of them. In particular, many investment companies’ exposure to overseas stock markets has proved beneficial because some of these markets have recovered more rapidly from the coronavirus crisis than the London Stock Exchange.
For example, while the FTSE 100 index, a benchmark of Britain’s biggest companies, has fallen by 15% since the start of 2020, the Dow Jones index of American blue chip stocks is 8% down. Meanwhile, the Standard & Poor’s 500, a broader measure of the US market, has fallen by less than 2% over the same period.
One reason for the American market’s resilience in this crisis so far is that far more healthcare and technology businesses are listed there than in Britain. Healthcare companies have benefited from the search for a vaccine or cure, while many technology businesses’ revenues have boomed as more people work from home and shop online.
Coming down from the clouds, two of my most valuable shares have surfed both trends. Worldwide Healthcare, a self-descriptive investment trust in which I have been a shareholder for more than a decade, has delivered positive total returns of 14% over the last three months and 39% over the last year, according to independent statisticians Digital Look and Morningstar. Meanwhile, Polar Capital Technology, another investment trust in which I have been a shareholder for more than a decade, has soared by 22% in the last three months and 52% over the last year.
Neither pays much income; while Worldwide Healthcare yields 0.7%, Polar Capital Technology pays no dividend. Even so, such good total returns, especially in such bad times, mean I am very happy to pay ongoing charges of 0.9% for the former share and 1.33%, including a performance fee, for the latter stock. Both benefit from professional fund management, like all investment companies, which enables shareholders to gain access to opportunities in specialist sectors of which we know little or nothing.
Similarly, reading about the search for a vaccine prompted me to invest in International Biotechnology Trust in April, where hopes for some of its underlying holdings have helped deliver total returns of 29% in the last three months and 28% over the last year.
International Biotechnology Trust has ongoing charges of 1.68%, including a performance fee, and - unusually for its sector - yields 3.3%. This trust’s stated policy is to deliver a dividend equal to 4% of its net asset value (NAV) at the end of the preceding financial year.
Unlike other forms of pooled fund, investment companies can enhance dividends with capital gains and sustain income payments to shareholders by retaining up to 15% of income they receive in good years to top up distributions in bad years. Investment companies’ closed-ended structure also means their managers are never forced to sell assets to meet redemptions when confidence and prices fall, as often happens in a crisis.
Many of these characteristics of investment companies may have seemed like tedious technicalities in less challenging markets. Sometimes it takes a new threat to make us appreciate old safeguards or tried-and-tested ways to cope with the uncertainties of investment.