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QD view – two years since the world changed

This week (Wednesday 23 March, to be precise) marked two years since the first lockdown was implemented in the UK in response to the COVID-19 pandemic. It feels like a long time ago yet also as if it were just yesterday. Our perception of time is one of the many things that the pandemic has – for lack of a better word – messed up.

But alas, it has indeed been a full two years and during that time, life continued, albeit slowly, as did economies and their respective markets.

Despite the initial hit on companies and investments in March 2020 which continued throughout the year for many, 2021 was somewhat of a year of recovery for most as vaccine roll-outs started to take effect. There has been much uncertainty during the last two years, as well as a myriad of predictions of what life might look like post pandemic. With the passing of the two-year anniversary, we thought it would be a good time to take stock of where we are and to have a look at some of the big moves during the past couple of years.

In its annual results published yesterday for the year to 31 December 2021, International Public Partnerships noted that the effects of COVID-19 are finally receding. Meanwhile, trusts from a range of mandates such as Herald, JPMorgan US Smaller Companies and CC Japan Income & Growth have outperformed after initially challenging periods.

This isn’t surprising considering almost every sector has recovered strongly over two years to 23 March 2022 in both NAV and share price terms. The commodities & natural resources sector is up 114% in NAV terms and a huge 247% in share price terms over the period, though much of this is likely attributable to movements and events that have taken place since the start of this year.

Even the UK has recovered – and then some – over that time, despite having been unloved for many years prior to the pandemic (you can hear about how that perception is finally changing by watching our UK Round the World UK webinar here). The UK All Companies sector is up 73% in NAV terms, followed by UK Smaller Companies (+70%) and UK Equity Income (+66%).

The only sectors to have not delivered a positive return since 23 March 2020, and therefore it could be argued have not recovered, were property – rest of the world (-17.7%) and leasing (-26.8%). The former has suffered from a range of individual member circumstances. For example, both Aseana Properties and Dolphin Capital Investors have been long-term laggards (Dolphin being the more disappointing of the two, over the last decade, by a margin) while Macau Property Opportunities is in wind-up mode – though the pandemic has meant it has struggled to sell some of its holdings. Ceiba holds Cuban assets including a good chunk of quality international hotels which unfortunately, still haven’t recovered from COVID-19. Meanwhile, leasing funds were especially impacted by the global travel ban. Unsurprisingly, Doric Nimrod Air Three, was one of the worst performing trusts by NAV terms, down by 27%.

In terms of discounts, while most sectors continue to trade on an average discount today, these have significantly improved since the first UK lockdown was imposed. Debt – structured finance tops this list, with its 40% discount as at 23 March 2020 narrowing to a 5% discount today. The improvement has likely been boosted by the recent merger announcement between TwentyFour Income and UK Mortgages.

This is followed by property sectors, UK logistics (moving from a 25% discount to a 9% premium), UK commercial (41% discount to a 9% discount) and UK healthcare (28% discount to a 0.1% premium).

Property is an area that has experienced a bifurcation in outcomes across the course of the pandemic. With most populations advised to stay at home for more than three months in 2020, and then on and off since then, a sharp fall in commercial property was inevitable – particularly in the hospitality sector – but since then (and as evidenced by recent figures) there is still strong demand within the industry. In its annual UK Real Estate Outlook, CBRE said 2022 could be a year of recovery for the commercial property market with a renewed sense of optimism and growing economy. At the other extreme, property assets that are focused on the new normal, for example, logistics assets, have benefitted as the pandemic accelerated the trend towards online shopping.

Sectors that have seen their average discount widen over the two years include flexible investment, royalties, financials, infrastructure securities, environmental and property – rest of the world, though the former two have since narrowed.

Looking at individual trusts, Geiger Counter has been the best performer since the UK went into lockdown, having delivered an impressive 550% in NAV terms and 586% in share price terms thanks to a combination of a market in supply deficit, an increasing awareness that nuclear needs to be a greater part of the mix if we are going to decarbonise our energy supplies and the situation in Ukraine amplifying nuclear’s importance in helping the west achieve energy security. It’s joined by fellow commodities & natural resources trusts CQS Natural Resources, BlackRock World Mining and BlackRock Energy and Resources Income. You can read more about how the sector has changed in our QD view – feeling resourceful, which was published earlier this month.

The worst performer over the period was JPMorgan Russian Securities, which is down 91% in NAV terms and 80% in share price terms, but again, this is more than likely a result of recent events rather than the impact the pandemic has had on it.

Global events aside, perhaps it’s the idea that the worst of COVID-19 is – seemingly – in the past now or maybe it’s the glorious weather we’ve had this week, but optimism is certainly going around at the moment. These numbers show that most sectors have not only recovered, but have performed exceptionally well in a time that threatened most markets around the world. To me, that seems like the good news we all needed.

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