This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
US stocks have long been a dominant force in the global equities market. Companies listed in the country made up close to 60% of the world’s total market capitalisation at the end of 2021.
They’ve also driven a huge proportion of the returns many investors have seen thus far in the 21st century. World-leading companies, like Google, Facebook, and Amazon, are all based in the US and have been the focal point of the stock market for much of the past decade.
Investors naturally want to take advantage of this, and huge numbers of people have invested in US shares as a result.
For many investors this has meant going it alone and buying shares in individual companies. This phenomenon became particularly acute during the Covid-19 pandemic, when many investors flocked to highly valued companies in the US market. Others have invested in the US by buying shares in investment trusts focused on the country.
Investing in US stocks with investment trusts
Investment trusts are a type of closed-ended fund available to investors in the UK. They are set up as companies and listed on an exchange. Investors who want to access trusts can buy shares in them, much like they would with shares in any other listed company.
The reason some investors looking to invest in the US prefer using investment trusts, as opposed to buying stocks themselves, is that they have some features which arguably make them a better option than going it alone.
Trusts are managed by professional fund managers, who use their expertise to try and find the best companies out there. This active approach means shareholders may be able to see superior returns to those produced by the market as a whole.
It’s also a very easy way of accessing the expertise that the trust managers offer. High returns are obviously not guaranteed but it’s certainly much simpler to pay an investment trust to make investment decisions for you than to do it yourself.
This process is arguably more pertinent for the US stock market. US companies are often very efficiently priced because so many analysts cover them and such a large amount of investment flows into them.
Finding good opportunities may be easier in some ways because of this but it can also mean unearthing companies that are more attractively valued is tricky.
It’s also worth bearing in mind that the US, like all other markets, has a sizeable number of smaller companies that don’t receive the same level of attention as the big players. Investment trusts, particularly those that specialise in these smaller businesses, can be a useful way of getting exposure to them in your portfolio.
Investment trust benefits
Investment trusts also have structural benefits which can help boost performance when compared to other types of funds.
The main one is due to their being set up as publicly traded companies. The buying and selling of trust shares takes place on an exchange between individuals or companies. Trusts are not part of this process, which means they don’t have to pay out cash to anyone who sells their shares.
Open-ended funds do not have this luxury. When someone sells units in an open-ended fund, the fund managers have to give that person back cash. In order to make sure they can do this, they have to keep a large chunk of their assets in cash.
The result is that they tend to see a drag on their performance because the returns on cash are so low. In contrast, investment trusts are free to invest a much larger proportion of their assets. If they make good decisions, it means they’ll typically produce higher returns than open-ended funds as a result.
Aside from this structural point, investment trusts can also use gearing – borrowed money – to invest. Doing this can enhance returns, although investors should be aware that the opposite is also true; gearing can magnify downside as well as upside.
The US investment trust sector
There are six investment trusts that invest in US stocks as of June 2022. Four of these focus on larger companies and the remaining two invest in smaller firms.
Different trusts have different goals, leading them to invest in a variety of companies, something which in turn usually leads to disparate outcomes in total return.
That’s not to say one is superior to the other, nor is it indicative of future results. But it does show things are a bit more complicated than the average return might suggest.
It also reflects the different approach the trusts take to the market. North American Income, as its name suggests, is more focused on providing a dividend to shareholders. As such it’s less likely to invest in growth stocks that may not pay them.
Conversely, JPMorgan American has tended to hold a balance of value and growth stocks in its portfolio. Given the story of the past decade has been growth’s outperformance in the US, it’s not so surprising that it managed to deliver higher total returns.
Investors should be conscious of these dynamics before they invest and keep in mind that even if a trust has performed exceptionally well in the past, it may not repeat that, nor may it necessarily fit with individuals’ goals or risk profile.
Past performance is not a reliable indicator of future results
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