‘A short sellers’ paradise’ – Long/Short funds flourish in 2022 as niche investments take centre stage

by | Jan 5, 2023

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As we enter 2023, Nick Wood, head of fund research at Quilter Cheviot, takes a look at the best and worst performing funds and investment trusts of 2022 and the factors behind the performance:

“2022 will be a year many investors will want to forget in a hurry as volatility struck and left few hiding places. It is a year that will be remembered for Russia’s invasion of Ukraine and the subsequent energy crisis that has engulfed the global economy. This has helped to intensify the cost-of-living crisis and altered the course of inflation leading to more aggressive central bank policies to bring it back in line.

“This has brought with it a switch from growth style investing to value, as tech names have struggled, and the legacy energy giants and financials have profited. This has created an investment environment where commodity and value funds and investments trusts will naturally perform well due to their sectors. However, we have also seen a number of more niche and specialist vehicles outperform in what has been a difficult 2022.

“Take the investment trust space and you can see a number of the top performers are involved in aircraft leasing – an often complex and very different sort of return generator. These have struggled in recent years as a result of the pandemic but have bounced back strongly due to supply chain shortages and major aircraft companies struggling to deliver planes on time. That said, they are not suitable for the average DIY investor and instead need to be scrutinised closely.  

 
 

“At the other end of the table, and having been in the top ten of 2021, it was a tough year for those investment trusts that focused on early-stage, private companies. The rising interest rate environment has made valuing these companies much more challenging and as such the overall share prices of the likes of Chrysalis and Schiehallion, the two most well known of this type of investment trust, have taken a substantial hit. Interestingly, many of the laggards are recent launches too, with some of them coming to market as recently as 2020. This may serve as a reminder to investors that investment trust launches often come at a time when the market for those investments is at its hottest and thus, they must proceed with care. 

“Comparing the winners within the trust world versus open-ended, two things jump out. Firstly, the winners in the trust space include a significant number of illiquid assets, such as aircraft, highlighting the benefit of the structure, and investments that largely cannot be held comfortably within the open-ended space. We are also once again seeing hugely divergent returns in the trust space, at least considering the top ten, highlighting the opportunities, as well as potential pitfalls, out there for investors who are a little more investment structure agnostic.  

Ten best performing investment trusts 2022
Price Total Return 2022 (%)
DP Aircraft235.9
Doric Nimrod Air One159.9
SLF Realisation C106.1
Doric Nimrod Air Three73.7
Doric Nimrod Air Two70.8
Amedeo Air Four Plus56.1
Riverstone Energy45.8
JZ Capital Partners44.7
SME Credit Realisation37.7
BlackRock Energy & Resources Income36.6
Ten worst performing investment trusts 2022
Schiehallion Fund-62.8
Blue Planet IT-63.8
Seraphim Space-64.0
Molten Ventures-65.2
Seed Innovations-67.9
Jade Road Investments-68.0
Home REIT-68.6
Chrysalis Investments-68.6
Myanmar Investments-69.9
JPMorgan Emerging Europe, Middle East & Africa-87.7

Source: Numis, Quilter Cheviot, as at 31/12/2022

 

“Turning attention to the open-ended fund space and it is not a surprise to see funds with large amounts of exposure to Russia struggle in 2022 as many marked those holdings down to zero. It is also hardly surprising to see some tech and US funds down in the bottom ten given the experience the mega cap companies have had this year, with most being brought back down to earth following a very successful pandemic period. And finally, as a nod to the political chaos that was imparted on the UK during the Liz Truss premiership, two UK gilt funds found themselves in the worst performing funds. This year has seen a real breakdown in the diversification element of government bonds, but with inflation now seeming to have peaked and the expectations around interest rates coalescing at a lower level, we expect this could just be a blip for those gilt funds heading into 2023.

“Looking at the winners of 2022 in the funds world and you can see a similar trend to the investment trust space, with energy and commodity funds benefiting from the surge in inflation seen this year. However, it appears the big winners this year have been short sellers, with a number of Long/Short Equity and absolute return funds populating the top ten. With the volatility we have seen this year, and a reversal in fortunes for those that had done so well, it has been somewhat of a paradise and fertile picking ground for short sellers.

“Latin American funds, a pretty rare breed these days, were also high up the list. Also in that list was the Invesco Emerging Market ex China Fund. It’s interesting that we have begun to see EM ex China funds begin to be launched. The narrative when these began to launch two or three years ago was that investors would want dedicated China exposure and that China would become its own region like Japan. That may well be the case in the long term, but perhaps in the short term some investors will see EM ex China funds as a way of avoiding China altogether if they are sufficiently nervous about the short- and medium-term prospects and politics of the country.

 
Ten best performing funds in IA universe 2022
Total return (%) in GBP
TB Guinness Global Energy49.2
Thesis Bryth40.2
JPM Natural Resources32.7
BlackRock Natural Resources Growth & Income32.4
Invesco Emerging Markets ex China (UK)28.9
VT Clear Peak Capital UK Long/Short Equity28.5
Liontrust Tortoise22.0
FP Argonaut Absolute Return21.6
Tm Fulcrum Diversified Core Absolute Return19.9
abrdn Latin American Equity19.6
10 worst performing funds in IA universe 2022
CT Overseas Equity-Linked UK Gilt 3-40.2
Janus Henderson Institutional Long Dated Gilt-40.3
Fidelity Duration 20 Feeder -43.1
Fidelity Emerging Europe, Middle East & Africa-44.8
Morgan Stanley US Advantage Acc-48.8
Baillie Gifford American-50.1
Morgan Stanley Global Insight-50.6
T. Rowe Price Global Tech Equity-50.9
Liontrust Russia-60.1
JPM Emerging Europe Equity

Source: Morningstar, Quilter Cheviot

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