Winterflood Monthly Report - April 2020

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Partial recovery reflects potential dividend sustainability

The recent sell-off in global markets has been dramatic. The full impact of Covid-19 on economies and societies around the world is impossible to quantify at present but is clearly profound. Despite a partial recovery towards the end of the month, the FTSE All Share Index recorded its second weakest monthly return in the last 25 years in March, with a decline of 15.1%, having been down 25.5% at one stage.

The investment trust sector has not been immune from the impact of Covid-19. Indeed, the daily price moves that have been seen across the sector over the last six weeks are reminiscent of the dark days of 2008. However, in contrast to 12 years earlier, the sector has outperformed the wider UK market so far this year, with a decline of 14.6% for the FTSE Equity Investment Instruments Index to 8 April, compared with a fall of 24.5% for the FTSE All Share Index.

The sector saw a massive de-rating in March. At the start of 2020, the sector average discount stood at 1.1%, causing some to comment that investment trusts had never had it so good. After widening to 6.0% by the end of February, it hit 22% at one stage in March, a level last seen in 2008/9. However, there has already been a substantial recovery, and the sector average discount currently stands at 6.7%. In our opinion, this partially reflects the attractive dividend characteristics of many listed closed-ended funds. It would be rash to predict that discount volatility will be subdued from now on, but we believe that those investment trusts that can demonstrate their ability to sustain their dividends in the current environment will remain highly rated.

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