Managers of UK-focused investment trusts are optimistic for 2023. So says, Nick Britton, head of intermediary communications at the Association of Investment Companies (AIC).
Global markets look set to end 2022 in negative territory, Britton noted, with the average investment company losing 15% in the 11 months to November. ‘Inflation, war, recession -this year seems to have proved the theory that troubles come in threes’ he said.
Commodities and renewable energy were among the few bright spots, Britton added, though UK and global equity income have held up much better than their growth-focused counterparts. ‘Rising interest rates,’ he said, ‘have punished most equity sectors, property and private equity’.
‘The income-focused ones have had a relatively good year,’ Britton added, ‘but UK stocks are still poorly valued compared to the wider market.’ Some think the correction may already be happening, with some examples of NAV rises of 10% or more in November within the UK smaller companies sector.
‘Clearly that would be positive for a whole range of asset classes,’ Britton said, ‘and for investment companies in general. In particular, we could expect to see property, private equity and debt all perking up.’ However, barely half the investment company managers who responded to the AIC’s anonymous annual poll expected markets to go up in 2023, where normally there would be a comfortable majority expressing optimism.
There are still opportunities in the market, however. ‘More analysts and commentators are starting to talk about investment company discounts,’ Britton said, ‘which widened by more than 10% in 2022. For investment companies who invest in equities, discounts are at levels last seen in the early stages of Covid-19.’
There is also excitement around private equity. Britton said he recently spoke to four investment company analysts, all of whom highlighted the sector as one where discounts have widened excessively, creating potential bargains, and pointed out that leverage and commitments are lower than they were going into the financial crisis.
Diversification on investment company boards is an issue that will come to the fore in 2023, Britton said. New FCA rules will put ethnic diversity in the spotlight, with listed companies required to state whether they have met three distinct targets: having at least 40% of board roles filled by women, at least one senior position held by a woman, and at least one director from an ethnic minority community.