2001 was an "annus horribilis" for equity investors in general, and for the investment trust sector in particular.

Without doubt, the year will be remembered for the tragic events of September 11. But even without this, followers of investment trusts would need rose tinted glasses to look back favourably on the year in which the FTSE investment trust Index (ITC) fell of 15.6% in NZ$ terms (19.9% in sterling terms). This is the largest percentage fall in the index over a calendar year since 1990. In that year, the fall in the index was noticeably higher at 22%.

Thankfully, though it was not all gloom and doom with a number of positive developments to look back on.

Key points from 2001 include:

• The large fall in the ITC compared with a decline in the MSCI World Index, in NZ$, of 12%. factors in the underperformance of the ITC index appear to have been.

1. Level of gearing against a backdrop of falling markets
2. Discount widening
3. Underperformance of UK smaller companies, which make up a higher proportion of the ITC index than the MSCI World. The FTSE Small Cap x IT Index fell by 18%.

• Fallers: Companies with high weightings in growth stocks and TMT lead the declines. Fleming Technology saw the greatest fall, down 56%, followed by two growth-orientated stock pickers TR European Growth losing 50% and Henderson Smaller Companies down 43%. M L New Energy, an even more esoteric technology play, declined by 43% with Polar Capital Technology losing 36% over the year. It may well be worthwhile keeping an eye on all these stocks. There is no problem with any of the manager’s ability; it was simply a situation of being in the wrong sectors. And, as so often is the case, last year’s losers could well be this year’s winners.

• Risers: Over the year the sector saw share price rises in 43 out of the 240 conventionally structured investment trust companies. These included some of the emerging market specialists such as Baring Emerging Europe, which rose 38%, and Genesis Emerging Markets, which added 7%. Closer to New Zealander's hearts, the Australasian bets paid off with Henderson Far East adding 40% to its price and the New Zealand Investment Trust returning a stellar 31% against a local index that was up a mere 8%. Surprisingly one could have made money last in the US markets, as F&C US Smaller Companies showed increasing its share price by 15%. Of the generalists, 2001 was Michael Moule’s chance to laugh back as Bankers Investment Trust, up 4% the only one to show a positive return, benefited from continued good performance of value stocks relative to the TMT sectors. Many of the risers also saw narrowing discounts, as investors bought into those investment trusts that performed well.

• Discounts: As one would expect, the average sector discount widened during the year. However, the size of the widening was not as dramatic as might have been expected given the weakness in global stock markets this was also helped by share buybacks, which continued over the year. The average sector discount rose from 9.2% to 10.9%. One of the largest changes was the rating on the TMT sub-sector, where the average changed from a 16% premium to a 10.4% discount. The European average discount moved from 6.7% to 7.8%, while the international generalists’ average discount widened only slightly from 11% to 11.4%.