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Investors will win from RDR emphasis on IT
by Alan Brierley on Mar 16, 2011 at 00:01
With the retail distribution review (RDR) less than two years away, we recently revisited the performance records of the closed and open-ended fund industries. The results will continue to make difficult reading for those who have shunned closed-ended funds and focused on the commission-paying open-ended funds.
The levelling of the playing field, when independent advisers will be required to give genuinely independent advice, represents a massive opportunity for the closed-ended industry. Last March, an article in the Financial Times suggested the closed-ended sector was run by a lot of fuddy duddies who had no place in the industry. This prompted us to take a closer look at the performance records of the respective sectors.
We found that investment companies had outperformed their open-ended counterparts in most sectors. Since that time, investment companies have extended this record.
We would highlight the following:
In terms of net asset value (NAV) total returns over 10 years to 31 December 2010, investment companies outperformed open-ended funds in eight out of nine mainstream sectors (which account for 79% and 54% of the total respective industries). Rather counterintuitively, the only sector where closed-ended funds lagged was the UK small cap sector.
- In terms of NAV total returns, investment companies have outperformed relevant benchmarks in seven out of nine mainstream sectors over 10 years.
Open-ended funds have underperformed relevant benchmarks in all nine key sectors over 10 years.
- In terms of price total returns, investment companies have outperformed open-ended funds in eight out of nine key sectors over 10 years, most by a significant margin.
We then decided to drill down to the next level and look at the performance of directly comparable closed and open-ended funds. Yet again, investment companies stand out, outperforming in more than three quarters of cases.
Interestingly, out of 21 cases where there is a directly comparable fund, closed-ended funds have a lower base annual management fee in 20 cases – the simple average was 63 basis points. Although RDR represents a massive opportunity for the closed-ended industry, we wonder what appetite investment management houses will have for selling these lower margin products.
Over the past 10 years, the open-ended industry has seen funds grow 121% from £261 billion to £578 billion. Meanwhile, the closed-ended sector has enjoyed a more pedestrian growth rate, with assets increasing from £79 billion to £93 billion. While it is impossible to quantify the impact of commission paid to so-called ‘independent’ advisers, it’s fair to say superior NAV performance has certainly not been the key driver.
The experiences of two similar funds from the same manager – BlackRock World Mining (investment trust) and BGF World Mining Fund (unit trust) – is a classic example of the headwinds that have faced the closed-ended sector. Over the 10 years to 31 December 2010, the investment trust has delivered a compound annual growth rate of 25.7%, comfortably ahead of the 23% and 22% achieved by the unit trust and benchmark respectively. However, while the investment company has traded on an average 13% discount, the open-ended fund has grown from $23 million to a staggering $17 billion.
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