Commercial property and infrastructure funds had been enjoying a good start to the year. A mix of strong inflation-adjusted cash flows and resilient valuations had seen many investment trusts defy the volatility in stock markets. However, that changed on a sixpence when gilt yields started rising. This shifted the risk free rate and changed the calculations by which many of the trusts were valued.

The UK logistics sector took the biggest hit, with the average fund down 18.1%, but property securities funds were also hit hard, down 16%. All commercial property sectors saw double-digit drops. Infrastructure and renewable energy infrastructure trusts proved a little more resilient, with the average fund down just 4.4% and 5.1%. 

Funds with more assets in the UK were hit harder. Equally, funds with ‘safer’ assets were also weaker, because less of the return comes from the credit risk of the assets. Funds where there was more apparent inflation protection – such as renewable energy assets – were stronger. 

This will unsettle investors who had looked to these sectors as a source of stability in otherwise turbulent markets. It is perhaps more worrying because the trusts appear to have sold off because of a shift in how they are valued, rather than any operational weakness from the assets themselves. This creates a sense that investor returns are subject to the whims of actuarial science rather than fundamentals.

Most investment trust analysts believe that the sell-off has gone too far too fast. Investec, for example, said that although there is a correlation between gilts and discount rates, and between discount rates and the pricing of these assets, it was an imperfect one. It said: “We believe that consideration must also be given to the underlying cashflows of these companies and how these are expected to perform in the prevailing macroeconomic environment. In most cases, we believe that cashflow expectations are likely to have improved in recent months from a combination of factors including higher current and forecast inflation, foreign exchange, UK corporation tax changes and increased deposit rate assumptions.”

This may be a moment to revisit assets that still appear to offer considerable protection against a difficult climate. They have recovered somewhat since the Bank of England’s intervention in the gilt market and investors may start to revise their view as the panic ebbs in the wake of the mini-budget.