Jennifer Hill analyses the sectors delivering robust returns.
Russia’s invasion of Ukraine feels symbolic, not only of a marked change in the geopolitical landscape but also of a potential regime change in investing.
With oil, gas, wheat and many metals soaring in price, already-stubborn inflation is likely to prove persistently higher, cementing the reversal of a decade of subdued inflation and falling interest rates. “That’s been good for some traditionally defensive areas, but not for others,” says Rob Morgan, chief analyst at Charles Stanley. “Questions surround conventional bonds, for instance, and their correlation with growth equities is a worry for those with 60/40 portfolios tilted to these.” As investors scramble to diversify and hedge against a more inflationary outcome, which defensives are doing well?
A handful of investment trusts focus on listed natural resources companies. Two are managed by Blackrock - BlackRock World Mining and BlackRock Energy & Resources Income - and three by CQS: City Natural Resources Growth & Income (CYN), Geiger Counter (GCL) and Golden Prospect Precious Metals. They have all been among the best-performing trusts in the year to date, with share price rises ranging from 28% at GCL to 38% at CYN. “The outlook for these natural resources funds is particularly strong, given that commodities prices were rising prior to Russia’s invasion of Ukraine as a result of years of underinvestment, fossil fuel inventories held by utilities reaching record low levels, and inflationary pressures,” says Monica Tepes, investment companies research director at finnCap.
The flexible investment sector is home to a small band of capital preservation trusts – Ruffer, Capital Gearing (CGT), Personal Assets and RIT Capital – that have exposure to inflation hedges such as index-linked bonds and gold. “These funds have lowish exposure to equities, but the equities that they do hold tend to be defensive – stocks such as Microsoft,” says James Carthew, head of investment companies at QuotedData. Ruffer is the best-performing of the quartet so far this year, with its shares rising 6% in the first three months of the year. The chief drivers of performance have been gold and energy stocks, as well as protection in the form of two types of option – those that benefit from rising interest rates and those that profit from falling stock markets.
"Renewables infrastructure has been a particularly good place to be, with solar and wind assets benefiting from an anticipated uplift in the power price curve."
Healthcare stocks have sold off alongside the wider market – potentially creating an attractive entry point for trusts such as Bellevue Healthcare Trust, Polar Capital Global Healthcare, International Biotechnology and Worldwide Healthcare, all of which have seen their discounts to net asset value (NAV) widen. “The teams at International Biotechnology Trust and Bellevue Healthcare Trust are both extremely bullish on the outlook, and unusually have deployed gearing to maximise their exposure to what they see as a great opportunity with long-term structural tailwinds,” says Pascal Dowling, a partner at Kepler Trust Intelligence. These tailwinds include ageing and richer populations in the developed and developing world, and growing appetite for takeover activity as big pharmaceutical companies seek to shore up their treatment pipeline.
Listed infrastructure strategies often benefit from cashflows that are directly linked to inflation. “Renewables infrastructure has been a particularly good place to be, with solar and wind assets benefiting from an anticipated uplift in the power price curve,” says Morgan. Broader infrastructure trusts have also proved resilient. Analysts at Peel Hunt point to HICL Infrastructure and International Public Partnerships having the highest inflation sensitivities among social infrastructure strategies, but note that all trusts in this peer group exhibit positive inflation linkage.
Certain property sub-sectors are set to be clear beneficiaries of an inflationary environment; often, leases are inflation-linked. Peel Hunt has positive views on LXi REIT, Tritax Big Box, Tritax EuroBox and Supermarket Income REIT. Morgan regards BMO Commercial Property Trust and UK Commercial Property as “standouts so far this year."
“These broad core portfolios had previously been somewhat overlooked in comparison to more focused trusts in areas seen as having structural tailwinds such as warehouses or data centres,” he says. “However, there is significant embedded value in these more traditional portfolios, and by virtue of discounts to NAV closing a bit they have provided strong returns so far this year.”
There are less obvious beneficiaries of what is happening in the world, too. “Putting aside the devastating humanitarian impact of Putin’s invasion, the catastrophe in Ukraine has significant consequences from an investor’s point of view in many areas,” says Dowling at Kepler. “The trend toward deglobalisation, which began as supply chains collapsed during the Covid-19 crisis, has been accelerated by the war, and this could put trusts like Miton UK MicroCap – which has deglobalisation at the core of its investment thesis – in an interesting position. “Fund manager Gervais Williams published a book in 2016 which was actually called The Retreat of Globalisation and it seems somewhat prescient at this stage.”
