Something different

That stock markets tend to outperform other types of asset has become received wisdom, passed on from one generation to the next. But it is a statement that has always needed qualifying – and even more so today. First, given the volatility of equities, the principle only applies over the longer term. And second, investors now have access to a broader range of assets than ever before; in which case, maybe the stock market is no longer the only game in town.

That thought is prompted by a release from the AIC picking out the ten top-performing sectors of the investment companies industry in 2021 (to the end of November). The ranking is headed by the Growth Capital sector, Property – UK Logistics, and Country Specialist. The rest of the top ten are: Environmental, Private Equity, Property – UK Commercial, Leasing, India, Debt – Structured Finance, and Asia Pacific Smaller Companies.

The striking thing about this list is that there are very few traditional equity-focused sectors in it. These are funds investing in everything from venture capital and private equity to physical property holdings. And those stock market funds that have made it into the top ten are specialist, focusing on niches of the equity universe.

It is a list that tells us a couple of things. One lesson is that while the traditional mainstays of most people’s portfolios – UK equity holdings, or at least holdings in developed stock markets – are a perfectly reasonable foundation on which to build, they may not deliver the more exciting returns that investors hope for. Another observation is that investors with the imagination – and the ability – to diversify beyond traditional asset classes can do very well from them.

That word ability is important, because many of these asset classes have traditionally been off limits to ordinary investors. The unlisted companies held by Growth Capital and Private Equity funds are inaccessible to most. Buying commercial property or a logistics warehouse would not be possible for most of us on an individual basis. An activity such as leasing is even further from our reach.

Nor could you get into most of these asset classes through an open-ended fund, even though this structure still dominates the collective investment vehicle market. In many cases, open-ended funds with these exposures simply don’t exist. In others, they are fraught with difficulties.

The set-up of an investment company, by contrast, is ideal for investors looking for exposure to even the most illiquid and esoteric assets. With a fixed pool of capital, an investment company manager does not have to worry about inflows and outflows of investors’ money that might force them to buy or sell assets at inopportune – or downright impractical – moments. They can get on with the job of long-term investment. Investors, meanwhile, get the benefit of liquidity – the stock market-listing of the fund gives them a route in and out of exposure to the underlying assets at a time of their choosing.

It’s a remarkably democratic principle. These funds give all investors, no matter what their purchasing power, access to the same assets on the same terms. They level the playing field for retail investors who have so often missed out on opportunities available to their high-net-worth or institutional counterparts.

None of which is to suggest investors or their advisers should be moving all their money into these funds. Next year’s list of top ten sectors may look very different to the 2021 class; past performance, as we know, is no guide to the future. But that’s not the point here; rather, this year’s top performers are a reminder of the power of diversification and imagination in investment – and the importance of being able to act on those qualities.