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View the video online at http://citywire.co.uk/money/video/a894630
Still not convinced trusts trump funds? Watch this video
It's well known that investment trusts tend to beat open-ended funds over the long term. The JPMorgan Smaller Companies trust is a great example.
Many readers will be well versed in the fact that over the long term, investment trusts tend to outperform other types of funds, like open-ended investment companies (Oeics) and unit trusts.
But the scale of the difference took us aback. We invited Georgina Brittain, manager of both, to explain why. She even let us in on where she invests her own money.
Can't watch now? Read the transcript
Gavin Lumsden: Hello, with me today is Georgina Brittain, manager of smaller company and mid cap funds at JPMorgan. Georgina, thanks very much for coming in. Now, when you were with us last time, we spoke about the mid cap investment trust you run, so I thought we’d focus on the smaller companies investment trust you also run. But I’d start with asking you, which do you prefer? Do you prefer running investment trusts or open-ended funds?
Georgina Brittain: In terms of running money it actually makes no difference to me at all what the format is: investment trust, straightforward fund, Oeic, life fund, they are all the same: we look at the pots of money.
GL: The reason I ask is we’ve got a chart comparing the JPMorgan Smaller Companies investment trust with its open-ended counterpart, JPM UK Smaller Companies, which you also run. Now, since January 2003, the open-ended fund has generated a total return of 387%, which is very good, and it beats the FTSE Small Cap index, which has returned 232%. But now we look at the investment trust, JPMorgan Smaller Companies, and that has delivered 580%. Now why is there such a big difference in the performance? The funds are very similar, they are investing in the same sort of smaller companies, aren’t they?
GB: Yes, in actual fact, the underlying holdings within the funds, so the actual companies we invest in are pretty much identical. When we buy for one, we buy for the other, so there is no difference there. That huge difference which you’ve just described comes down to gearing. So clearly the open-ended smaller companies fund cannot be geared and within the investment trust we generally remain geared, not in 2008/9, but generally we are geared throughout.
GL: And gearing is you are borrowing money so you can invest more money on behalf of investors.
GB: Exactly, and to be clear, this is low risk. So we are not borrowing another 50% on top of the fund.
GL: It’s currently 8%...
GB: It’s 8% and the board has set a level for quite a few years now which is 10%.
GL: So it never goes above 10%?
GB: It hasn’t gone above 10% for many, many years, but still you can see the results in those two numbers.
GL: So over 13 years even though you are doing a modest amount of borrowing it can still have that kind of effect?
GB: Yes, astonishing isn’t it.
GL: It is astonishing. A lot of our viewers will be familiar with the fact that investment trusts, well-managed trusts in the hands of a good manager, will do better than an open-ended equivalent. But nevertheless it’s very striking to see it in front of us like that.
GB: Yes, and as I say this is an example where you do have pretty much identical holdings. So it’s a lovely clean example.
GL: Well if we’re highlighting long-term performance, which has been good, we should also talk about more recent performance, which has been difficult. This year has been difficult for lots of funds, for lots of investors, and the investment trust has been down around 9%. Why is that, has there been profit taking by investors after what was a strong year last year.
GB: As I’m sure you’re aware, when you are looking at investment trusts, you’ve got the net assets, so that’s the value of the things that we own, but then the share price can reflect wither a premium to those assets or a discount.
Discounts work so that, if for example the trust is on a 10% discount, you’re buying 100p worth, and you are paying only 90p for it.
GL: So it’s a bargain…
GB: It’s a bargain. However, discounts can move the wrong way as well as the right way, so over time one would naturally expect that discount to narrow a little bit.
GL: And it got quite narrow at the end of last year…
GB: But at times of volatility, and we’ve seen this unfortunately in many volatile times, discounts move out.
GL: So that gap has moved out. So the share price has fallen faster than the value of the portfolio.
GB: Exactly that.
GL: Now what’s been driving that? Obviously there are the fears about the global economy, but there’s also the impending threat around the European Union referendum. Is that something that’s been worrying you?
GB: In a word, yes. So, clearly we’ve known this was coming, Cameron had made it very clear that this was going to happen. But remember it was only very recently that an actual date had been set.
GL: But you’re investing in UK smaller companies, so what’s the problem?
GB: What you are absolutely guaranteed to get in the very short term, so prior to the referendum, is volatility.
GL: And we’ve seen that already.
GB: And that was partly, a little bit Brexit, but there were other causes in January that really sent the market down. I’m expecting that, especially in UK stock markets, we are going to see some of this. Beyond that, as you say, we’ve got to look at our companies, look at how we are positioned and work out that if life did change and the UK population did actually choose to leave, what’s that going to do to our companies.
GL: Is it a question of how much overseas earnings and business they do?
GB: I think the one thing most people agree on is if we were to leave, in the short term sterling would fall.
GL: The pound falls.
GB: The pound falls, so generally that should be very good if you are an exporter. However, there are two ‘howevers’. Again, nothing is that simple, so some of these exporters will also have quite a lot of debt, and if it’s foreign debt, the value of your debt goes up, profits are going down because they are in sterling and you may actually find you’re in difficulty because, yes, you’re exporting cheaper goods, but actually you’ve got a balance sheet problem.
GL: Where do you invest your money? In the investment trust or in the open-ended fund? I think I know the answer.
GB: Well actually I should say I am invested in both, it is very important I say that. But actually the predominance is in investment trusts, for the two reasons we have already discussed. Absolutely the gearing, and we’ve seen why, but also discounts. I can’t help it, I’m a natural bargain hunter and if I can buy 100p’s worth at 90p or even 85p at the moment, that’s what I’m going to do.
GL: Georgina, thanks very much for talking to us.
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From the Forums
by Gavin Lumsden on Oct 21, 2016 at 17:18