Investment Trust Insider - Opening the door to investment trusts

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Proof that investment trusts beat funds 80% of the time

Proof that investment trusts beat funds 80% of the time

Investment trusts deliver better results for investors than rival open-ended funds although new analysis by Winterflood Securities suggests their performance advantage can be narrow and should not be taken for granted.

Equity trusts beat rivals

Winterfloods found that over ten years to 30 November, the average performance of investment trusts investing in equities, or shares, beat open-ended funds in nine major sectors: Global, Japan, Europe, UK All Companies, UK Smaller Companies, UK Equity Income, Global Emerging Markets, Asia Pacific ex-Japan and North America.

Whether they looked at the underlying movements in the trusts’ net asset values (NAV) or the share price returns their investors actually received, the result was similar: investment trusts outperformed open-ended investment companies and unit trusts by between 0.3% and 3% a year, with global, Japan, Asia and UK equity income trusts doing best.

Reducing the time period to five years, investment trusts won in seven of the nine sectors, with open-ended funds only coming top in North America and Global Emerging Markets. Global and Japan trusts were particularly impressive, delivering superior annual returns of over 5% and more than 8%, according to Winterfloods’ analysis of Morningstar performance data.

Closed vs open-ended

The reason for this strong record are investment trusts’ structural advantages, Winterfloods explained. Trusts have a fixed pool of capital, which is why they are sometimes known as ‘closed-ended’ funds. This makes them easier to manage as investors who want to access an investment trust buy its shares on the stock market rather than the fund manager. By contrast, investors in open-ended funds buy the shares or units from the fund manager.

Consequently, managers of open-ended funds can frequently face big outflows of money when investors pull out during poor market conditions. This either requires them to keep an un-invested pile of readies at hand at all times – leading to ‘cash drag’ on their fund’s returns – or to sell investments at low valuations to generate the cash their investors want.

‘In contrast, managers of closed-ended funds do not face these constraints and can therefore take a truly long-term approach to investment, which should also help to reduce portfolio turnover and the associated trading costs,’ said Winterfloods.

This robustness also makes it easier for investment trust managers to invest in smaller companies, the broker said. While ‘small-cap’ stocks often have better growth prospects than larger companies, they are illiquid and harder to buy and sell quickly.

‘In addition, investment trusts have the ability to use gearing [borrowing], which will contribute to returns in rising markets,’ the analysts said.

Head to head

Significant as these findings are, they are based on averages. A slightly different picture emerges when you compare the performance of investment trusts with equivalent open-ended funds run by the same manager.

The table below shows that of the 45 investment trusts with a five-year record, 35, or 78%, achieved better net asset value (NAV) returns than their equivalent open-ended funds. Slightly more, 36, or 80%, delivered higher shareholder returns. Over five years investment trusts’ average annual outperformance was 1% for NAV returns and 2% for share price gains.


Trusts vs funds: the five-year gap 

Investment trust (ticker) Open-ended fund 5-yr difference in net asset value (NAV) % 5-yr difference in share price %
Baillie Gifford Japan (BGFD)  Baillie Gifford Japanese  67.1 147.4
Impax Environmental Markets (IEM)  Impax Environmental Markets (GBP A)  28 65.2
JPMorgan US Smaller Companies (JUSC)  JPM US Smaller Companies  18.3 53
JPMorgan European Smaller Companies (JESC)  JPM Europe Smaller Companies  9.3 52.3
Henderson European Focus Trust (HEFT)  Henderson European Focus  12.6 50
Schroder Japan Growth (SJG) Schroder Tokyo  25.4 48.5
Invesco Asia (IAT) Invesco Asia (Ordinary Share) Invesco Asian Focus Equity  25 33.4
JPMorgan Global Growth & Income (JPGI)  JPM Global Focus  7.7 29.1
Henderson Smaller Companies (HSL)  Henderson UK Smaller Companies  13.5 28.9
Fidelity European Values (FEV) Fidelity European  12.3 26.3
Invesco Perpetual UK Smaller Companies (IPU) IP UK Smaller Companies Equity  -8.3 25.1
BlackRock Emerging Europe (BEEP)  BGF Emerging Europe  9.8 23.7
Schroder UK Mid Cap (SCP)  Schroder UK Mid 250  13.7 23
JPMorgan Smaller Companies (JMI)  JPM UK Smaller Companies  9.2 17.9
JPMorgan Indian (JII)  JPM India  16.2 17.4
JPMorgan Japanese (JFJ)  JPM Japan  -0.4 16.1
F&C Managed Portfolio - Growth (FMPG) F&C Multi-Manager Investment Trust  9.1 13.7
Schroder Asia Pacific (SDP)  Schroder Asian Alpha Plus  7.3 13
BlackRock Income & Growth (BRIG)  BlackRock UK Income  1.8 12.5
EP Global Opportunities (EPG)  Edinburgh Partners Global Opportunities  5.6 10.6
Lowland (LWI)  Henderson UK Equity Income & Growth  9.5 6.2
BlackRock World Mining (BRWM)  BGF World Mining  -1.4 5.6
Polar Capital Technology (PCT) Polar Capital Technology (Ordinary Share) Polar Capital Global Technology  -13.6 4.6
Edinburgh Dragon (EFM)  Aberdeen Asia Pacific Equity  6.8 4.2
Personal Assets (PNL)  Trojan 4.5 4
Aberdeen New India (ANII)  Aberdeen Global Indian Equity  2.2 3.6
Merchants (MRCH)  Allianz UK Equity Income  6 3.5
Henderson International Income (HINT)  Henderseon Global Equity Income  3.4 2.7
Standard Life UK Smaller Companies (SLS)  Standard Life Inv UK Smaller Companies  5.6 2.7
JPMorgan Russian Securities (JRS)  JPM Russia  3.2 2.1
JPMorgan Emerging Markets (JMG)  JPM Emerging Markets  1.4 1.9
Aberdeen New Dawn (ABD)  Aberdeen Asia Pacific Equity  7.3 1.6
JPMorgan Global Emerging Markets Income (JEMI)  JPM Emerging Markets Income  1 1.4
Henderson Far East Income (HFEL)  Henderson Asian Dividend Income  -8.2 1.2
Finsbury Growth & Income (FGT) Finsbury Growth & Income (Ordinary Share) Lindsell Train UK Equity  1.5 0.2
BlackRock Latin America (BRLA)  BGF Latin American BGF Latin American A2 USD -1.3 0
Murray Income (MUT)  Aberdeen UK Equity Income Aberdeen UK Equity Income 12 -2.2
Jupiter European Opportunities (JEO)  Jupiter European  -1.3 -4
Troy Income & Growth (TIGT)  Trojan Income Trojan Income -4.2 -4.7
Invesco Income Growth (IVI) Invesco Income Growth (Ordinary Share) Invesco Perpetual Income & Growth  2 -7.4
JPMorgan Brazil (JPB)  JPM Brazil Equity  -0.4 -7.5
Aberdeen Asian Smaller Companies (AAS)  Aberdeen Global Asian Smaller Companies  18.5 -10.5
Standard Life Equity Income (SLET)  Standard Life Inv UK Equity Standard Life Inv UK Equity -12.8 -14
Perpetual Income & Growth (PLI)  Invesco Perpetual UK Strategic Income  -1.6 -18.2
Dunedin Smaller Companies (DNDL)  Aberdeen UK Smaller Companies Equity  10.6 -24.7

Source: Winterflood, Morningstar. Sterling returns to 30/11/17

Star managers

The table's left hand column shows that leading fund managers such as Stuart Parks (Invesco Asia Trust), Neil Hermon (Henderson Smaller Companies), Andy Brough (Schroder UK Mid Cap), Harry Nimmo (Standard Life UK Smaller Companies) and Nick Train (Finsbury Growth & Income) can generate better net asset value growth and share price returns with their trusts rather than their open-ended funds.

Whitley wonder

The soon-to-retire star fund manager Sarah Whitley has done best of all. Her open-ended Baillie Gifford Japanese fund has generated a 175% total return over five years. However, her Baillie Gifford Japan trust has grown net asset value by 242% and its share price by 323%, equal to 11% and 20% growth a year. This gives the trust an outperformance of 67.1% and 147.4% in the third and fourth columns of our table.

Winterfloods explains this stunning performance was derived by the trust being 10-20% geared during the period, holding more small company growth stocks and enjoying a re-rating of its shares which started on a 10% discount but ended on an 11% premium to net asset value.

By contrast, Ben Rogoff's Polar Capital Technology Trust did worse than his Polar Capital Global Technology fund, an unusual feat partly explained by its relatively high holding in cash, said Winterflood.

Mark Barnett's Perpetual Income & Growth trust, whose poor performance he discussed in a video interview with Investment Trust Insider, also trails the UK Strategic Income open-ended fund he runs at Invesco Perpetual. 

Not for all seasons

The outperformance of investment trusts is genuinely  impressive. Winterfloods believe its data prove that investment trusts enjoy a meaningful advantage over open-ended funds.

However, they caution against concluding that trusts will always beat funds. They highlight how the benign market conditions of the last five years have been kind to investment trusts with discounts - the gap between their share prices and net asset values - narrowing and in some cases disappearing altogether. They rightly point out that these conditions could reverse and investment trust shares start to underperform.

'In our opinion, it would be misleading to conclude from this analysis that the majority of investment trusts will outperform their open-ended equivalents over most time periods. We are conscious that market conditions have been strong over the last five years and this tends to suite investment trusts, not least as a result of their ability to use gearing or simply being able to be fully invested. 

'However, if and where there is a marekt sell-off, our expectation is that investment trusts will underperform their open-ended equivalents for the same reasons. In addition, it is a reasonable premise that discounts will widen in volatile market conditions and ultimately it is share prices that drive returns to investors.' 

Investment trusts are a great way to invest long term in stock markets, but, as with all things to do with investing, always go in with your eyes open. Circumstances can and will change.

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