Market sell-off creates both risk and opportunity

At times of extreme market stress, investment trusts tend to behave more like equities than funds, with the prevailing sense of nervousness driving their prices well beyond their underlying net asset values. This discount volatility creates both an extra source of risk as well as a potential opportunity.

Whenever the market experiences a sharp sell-off like it has in the last few days, it is important to stay objective and not to get caught up in the panic. Long-term investors need to try to look through the volatility and maintain their positions as long as they remain comfortable with their overall portfolio.

The experience is a lot more enjoyable if you have cash available as you may be able to put it to good use by buying good quality investment trusts at a wider than normal discount. This provides a bit of downside protection and an extra boost to the potential returns when the market recovers and sentiment improves.


Before looking at some of the possible opportunities it is worth checking how the more defensive trusts have held up. The most defensive of the lot is probably the Personal Assets Trust (LON:PNL) and over the last month – with the FTSE 100 down around 6.6% at time of writing – it has lost just 2.2% and held on to its small premium to NAV.

The Ruffer Investment Company (LON:RICA) and RIT Capital Partners (LON: RCP) are both down around the same as the FTSE 100 and are trading at small premiums to their estimated NAVs, whereas the Capital Gearing Trust (LON:CGT) has slightly outperformed with a smaller than market loss of 4.6%.

These sorts of trusts make good core portfolio holdings as they tend to be less volatile than most other investment trusts, including when it really matters during periods of market stress, yet they are still able to deliver decent long-term returns.

It remains to be seen whether this is the big sell-off that a lot of us have been expecting or a relatively minor correction along the way.

When it comes to researching the potential buying opportunities it is worth starting with the biggest casualties. These include many of the smaller companies trusts and Japanese trusts that were amongst the best performers last year.

On Monday February 5^th, which was when the sell-off began to gather momentum, the biggest investment trust losers included small cap specialists such as Chelverton Small Companies Dividend (LON:SDV), JPMorgan Smaller Companies (LON:JMI) and R&M UK Micro Cap (LON:RMMC) with share price declines of 6% or more on the day. Over the last month they are down 12.4%, 5.9% and 1% respectively.

Two of the top performing Japanese funds, Baillie Gifford Japan (LON:BGFD) and Baillie Gifford Shin Nippon (LON:BGS), are down 8% and 5% respectively on the month, reflecting the global nature of the weakness, although both are still trading at a premium to NAV.

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Another top performing Baillie Gifford investment trust, Scottish Mortgage (LON:SMT), has also been caught up in the panic. The fund has built up an excellent long-term track record due in part to its significant exposure to the large US tech stocks, but as the FANG stocks have retreated so too has the fund, with the share price down 9.5% in a month.

Other significant casualties include the Healthcare and Biotech funds, with Worldwide Healthcare (LON:WWH) and the Biotech Growth Trust (LON:BIOG) down 8.7% and 12% on the month.

Neil Woodford’s woes have also continued with his Woodford Patient Capital Trust (LON: WPCT), which invests in young and developing UK companies, down 20% in the last three months, and the discount to its estimated NAV opening up to 9%.

It remains to be seen whether this is the big sell-off that a lot of us have been expecting or a relatively minor correction along the way. All you can do is keep watching and waiting for the buying opportunities to come along.