A careful approach for turbulent markets

It has been a tough start to 2022 and the outlook for the remainder of the year is also uncertain. Against this backdrop, investors need to look as broadly as possible for areas of structural growth and resilient income.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

This is a difficult moment for the global economy. The Covid-19 pandemic left government budgets strained, while the recovery has pushed inflation higher. The war in Ukraine has thrown the world’s energy markets into flux, bringing problems of supply and pricing. While these issues may resolve in the longer-term, investors will need to live with volatility for the foreseeable future. Flexibility will be needed to navigate these uncertain markets.

Higher inflation is likely to slow global economic growth, with particular weakness in the consumer segment. The so-called Great Moderation – that period from the mid-1980s until 2019 before the Covid-19 pandemic struck - was a remarkable period of stability of both growth and inflation. This was generally a good time to be an investor. Today, we are in a ‘new normal’, with inflation likely to be structurally higher, a new monetary policy environment and weaker growth.

This seems gloomy for investors, and certainly, it will be more difficult to rely on the market’s rising tide. However, there are plenty of areas that will thrive in this new environment. With a tougher economic environment, less liquidity and more expensive borrowing, it will be more important than ever to find areas of structural growth and resilient income.

To our mind, the investment trust structure is a better way to deliver the flexibility needed to manage a tougher environment.

Where to look?

We believe it is important to focus attention on where the most exciting opportunities are emerging, rather than starting with the index and working backwards. For example, the BlackRock Investment Institute states that the bumpy transition to ‘net-zero carbon emissions’ will help shape the new regime.¹ It adds: “We believe investors should start positioning for net zero. We think investors can be bullish on both fossil fuels and sustainable assets, as we see a key role for commodities in the transition…our work finds that changing societal preferences can give sustainable assets a return advantage for years to come.”² Against that backdrop, it will be important to invest with an eye on the new energy future - as we do across our mining and energy-focused trusts.

Equally, it will be important to look at the smaller end of the market. Technology is moving fast and it is tough for large companies, with cumbersome legacy systems to keep up. Smaller companies have a natural advantage. In our smaller companies trusts, we hold companies that are already on the right side of change – whether that is gaming companies or fast-growing investment platforms – or have the agility to pivot their businesses to new models.

It will also be important to look in new markets. Whether it is ecommerce in Latin America, or lithium miners in Chile, some of the most exciting opportunities are found beyond the conventional markets of the US, UK and Europe. Lithium, for example, is a key component in electric vehicle batteries and has a vast runway of potential growth.

How to look

The strength of the investment trust structure is that it allows fund managers the flexibility to invest in good companies wherever they may be found. Investment trusts are ‘closed-ended’, meaning they do not have to sell to meet redemptions from the fund, or invest where there are new inflows. With this in mind, managers of investment trusts do not need to limit themselves to the most easily traded parts of the market in order to accommodate those inflows and outflows, as they would do for open-ended funds (such as unit trusts or OEICs) but are free to look flexibly across the market. At a time when portfolio position needs to be dynamic and responsive, this is a significant advantage.

The same is true for income. The pandemic showed that income can be unpredictable. Drawing income as broadly as possible can help create consistency in income. As an example, in the BlackRock World Mining trust, we used this flexibility to invest in a number of debentures. These are illiquid, but the investment trust structure allows us to do it. Companies in frontier markets also tend to deliver a good income, which tends to be less correlated to developed equity market income.

Investors need to adjust to the end of the Great Moderation. To do so, they will need to be more adaptable and active in their investment selection. To our mind, the investment trust structure is a better way to deliver the flexibility needed to manage a tougher environment.

This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of August 2022 and may change as subsequent conditions vary.

¹ BlackRock Investment Institute ‘Positioning for the net-zero transition’ June 2022
² BlackRock Investment Institute ‘Positioning for the net-zero transition’ June 2022