Brexit volatility- taking a steady approach
BRITAIN’s vote to leave the EU surprised most people.
26 July 2016
BRITAIN’s vote to leave the EU surprised most people.
It has left many people feeling unsettled and uncertain, particularly about the country’s economic future. Sentiment is very important to the world of investing – as demonstrated by the UK and European stockmarkets plummeting on the day of the vote result, and on subsequent days, the FTSE 100 recovering sharply.
Even with such a quick recovery, many savers might be feeling concerned about their money. That’s why choosing the right kind of investment is critical to make sure your savings can weather any kind of market.
Investment trusts could be well suited to those with long term savings horizons. In particular they carry unique features which could suit savers seeking a regular income or those putting money away for the long term so it can grow. There are investment companies potentially suitable for each of these options.
Generating income is a priority for those who want to make their hard-earned savings work for them – perhaps in retirement or to help pay for school fees or university. In a recent survey of 20,000 investors from around world, 87% said they were looking for an income from their investments¹. It’s not always a straightforward task, especially when markets are volatile as they are at the moment. However, those who choose to save in investment trusts can have peace of mind that they should maintain a steady income stream, however markets are performing. That’s because they can hold back up to 15% of income generated by underlying assets each year to build up a reserve to be used to smooth dividend payments in tougher times. In addition, in certain circumstances, investment company boards may elect to pay income out of capital. While this can erode the long-term capital returns generated by the funds, many investors are happy to prioritise short-term income payments.
Growth investors might be interested in another unique feature which allows investment trusts to borrow. This means that if managers think there is value in a particular market, they can borrow money to use for further investments. This is known as “gearing”. In a rising market, returns from an investment trust can be magnified because gearing means managers are better able to take advantage of rising share prices. However, when share prices fall, the losses of geared funds can be exaggerated.
Investment trusts also have a unique pricing arrangement. The shares are listed on the stock exchange and the price is determined by demand. If the assets are out of favour the trust is likely to trade at a discount. When trading at a premium, it inflates the value of the assets. While the volatility of investment trust share prices may mean they are not always suitable for investors with a lower risk appetite or a shorter investment horizon, they could provide excellent value over the longer-term.
Further, a depressed share price when market shocks hit may be an attractive entry point for new investors. Investment trusts could therefore be a compelling new investment when the stock market is falling. Although there is no guarantee how quickly, or if at all, the discount will narrow, there could be well priced funds available.
Dealing with volatility
The Brexit vote will inevitably create new opportunities and challenges in markets. But experts are confident investment trusts are likely to continue to be an important component of long-term investing. Ian Sayers, Chief Executive of the Association of Investment Companies said: “Over the short-term markets are likely to be volatile. But investment companies will continue to operate to the same standards of transparency and governance, with independent boards looking after the interests of shareholders.”
A tried and tested strategy of drip-feeding money into the markets removes the need to get the timing right. By saving a monthly amount into an investment portfolio it is possible to cash in regardless of how the market is performing. By using this strategy it is possible to smooth out the highs and lows in share prices. When they rise, the value of stocks increase, and when they fall the next contribution buys more units. This is known among the professionals as “pound-cost averaging”. It also means that should money buy stocks at a lower price, there is a higher return when the market swings back up.
Investors who want guidance on funds they should choose, or if they are uncertain about the impact of the EU leave vote on their investments should speak to a financial adviser who can recommend the most suitable investments tailored to individual circumstances. Search for a local adviser at unbiased.co.uk or through vouchedfor.co.uk where clients leave reviews of their own advisers.
Please remember, the value of investments and the income from them may go down as well as up and you may not get back the amounts originally invested.
Schroders launched its first investment trust in 1924 and our range provides investors with access to a range of nine distinctive investment opportunities including: UK and Japanese equities, Pan-Asian equities and real estate.
To find out more, please visit www.schroders.co.uk/its
¹Schroders commissioned Research Plus Ltd to conduct, between 30 March and 25 April 2016, an independent online study of 20,000 investors in 28 countries around the world, including Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, the Netherlands, Spain, the UK and the US.
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