Those were an interesting few days after the much-trumpeted ‘liberation day’, weren’t they? I expect more crazy volatility over the next few weeks, but what do I know? 

I’m sure you’ve all had your fill of Trump-related news, so I’ll concentrate on the implications of the past 10 days for the investment trust sector. The big story for me is that we’re now midway through a scramble for diversification, which will favour active investment with differentiated strategies, including lower beta alternative assets such as infrastructure. That plays almost perfectly into what the London market is good at.

For too long, US exceptionalism has driven an almost blind momentum trade, with all the attendant concentration issues. Trump has put paid to that, and everyone from central bankers to bus drivers in Tunbridge Wells is now thinking about not being too reliant on the capricious whims of a Caesar in the making (a Caesar without the original Caesar’s myriad accomplishments, I might add). 

Did the defensive funds stand up?

We can see this at work through two performance-related metrics: monthly returns, which include the period before liberation day on 2 April (that glorious day in history), and from the end of 2 April to today. The roll call of winners and losers on these metrics is varied and, in some cases, surprising: UK small caps have had a terrible time while European small caps have outperformed. Go figure.

Most of the winners, though, are obvious, not least the gaggle of multi-asset defensive global funds that top everyone’s list of safe havens: BH Macro (BHMG) is the winner by some considerable distance, followed by Ruffer Investment Company (RICA ), Personal Assets (PNL ) and Capital Gearing (CGT ).

All performed as I would expect: defensively. Between 2 April to mid-afternoon today, in share price return terms, BH Macro is up 7.7%, RICA down 0.6%, PNL down 1.1%, and CGT down 1.5%.

I would have expected BH Macro, given its exposure to volatility-based trades, to have the most leveraged upside to the turbulence, although it is always tricky to work out exactly what’s going on inside this fund. We can see from the risk reports for the master fund that it had a poor start to the year – down 2.89% in January and another 1.61% in February. But from the end of February until 4 April, net asset value (NAV) per share ticked up from £4.16 to £4.26, and I expect some more gains in the next few days. As an aside, BH Macro’s discount of 8% looks a bit out of place given its past track record in times of elevated market stress.

The surprise for me was Ruffer Investment Company, which I would have expected to do a tad better in NAV terms. Its latest NAV, released on Wednesday, showed that asset value has been broadly stable at about £2.88 for the past few weeks. There have been big gains from ‘precious metals, primarily through gold-mining companies and silver bullion, which appreciated as demand for safe-haven assets grew’, the March factsheet reported. ‘A sizable contribution came from derivatives, namely protective positions in the credit market, which benefited as credit spreads widened.’

Still, these only seem to have stemmed losses elsewhere in the portfolio.

A lot of equity pain

Once we move beyond these defensive multi-asset funds, the pain becomes more obvious. Most global equity funds had a torrid time on most measures, but the good news for the investment trust market is that the huge UK equity income space – featuring many funds with more than £10bn in assets under management – provided some balm. Over the past month, according to Deutsche Numis figures, UK equity income funds fell by ‘just’ 8.6% in price return terms (-6.8% in NAV terms) against a decline of 7.4% in the FTSE ALL-Share index. With a yield in aggregate running at 4.5%, this popular fund segment is shaping up nicely as a defensive play on the volatility of the next few months.

Sticking with mainstream equities, emerging markets also had a torrid time: Fidelity China Special Situations (FCSS ) has won the prize for the biggest decline among investment trusts since 2 April, down nearly 18%, with trusts like Vietnam Holding (VNH ) also big fallers. For now, Trump is focusing on China, suggesting that Vietnam might escape with a deal at Mar-a-Lago. That might make the aggressive selloff in the Vietnamese equity funds a trifle overdone. 

As for China, Trump is angling for a deal soon with President Xi (‘a very smart guy’). We could see a dramatic turnaround in sentiment if and when a deal is done, with big investment trusts like Fidelity China Special Sits huge beneficiaries. I recently looked back at the performance data for the big trusts versus benchmark-based China exchange-traded funds and it’s clear you need active fund management when it comes to Chinese equities. 

Sticking with equities, I’d highlight two interesting casualties: Japan and biotech funds. Japanese equities have been consistently trending lower since the start of the year, underperforming nearly every developed market. This seems like a slight overreaction, especially for smaller-cap funds such as Nippon Active Value (NAVF ) whose share price is down 7.5% in the year to date but whose NAV has fallen just 2.1%. 

As for biotech funds, BB Biotech (BION) was down 22% over the last month, followed closely by Syncona (SYNC), down 21%, while International Biotech Trust (IBT ) is down 28% over a month and 14% since liberation day. The biotech segment has been through a murderous multi-year bear market cycle but has been looking more healthy in the last few months. Trump has put paid to that optimism, though.

Alts getting interesting

Moving beyond equities, alternative funds have also provided some protection. Except for the handful of shipping funds, most infrastructure and real asset funds have seen losses of 2-5% over the last month (renewables overall are down about 2.8%). Property funds, notably healthcare and student property, have held up especially well, helped by lots of M&A activity. For me, the big story here is the potential growing yield gap and changes in the UK interest rate. 

The massive volatility of the last few days must surely increase the odds of more aggressive rate cuts by the Bank of England. The five-year swap rate is already trending down to 3.77%, while the UK two-year gilt has dipped below 3.97% (as of yesterday). If we see interest rate cuts of half a percentage point, we could be lining up for a rally in alternative and real assets, with the average infrastructure fund yielding 7.8%, according to Deutsche Numis data. If the five-year swap and two-year gilt were below 3.5%, we’d be looking at a very wide yield spread, which could be a positive sign for reliable income-producing assets.

My bottom line? If you are worried and cautious about excessive US exceptionalism, diversify carefully, using the UK market’s long list of specialised fund managers within the investment trust universe. At the top of that list are defensive multi-asset funds, UK equity income, alternative infra, renewables and property funds. 

If you’re more bullish and waiting for the bounce-back, then China and Vietnamese funds look appealing, followed by biotech and tech funds: Manchester and London (MNL ) is an obvious high-conviction play alongside Polar Capital Technology (PCT ) and Allianz Tech (ATT ). Plus, of course, there are the inevitable diversified global equity plays such as Alliance Witan (ALW ), whose stable of managers has been cannily underweighting the US for some time now.  

Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitude towards risk.