Funds versus trusts over five and 10 years

Our research shows that while funds outperformed in the sell-off, investment trusts have the edge over five and 10 years.

The uptick in market volatility this year, stoked by the Covid-19 pandemic, is a timely reminder of the double-edged sword that is investment trust gearing, because it can enhance losses in a falling market (as well as enhancing gains in a rising market).

New research* by interactive investor, comparing the performance of funds and comparable investment trusts found that for eight of the 10 mirror portfolios the fund version outperformed.   

But the pendulum swings the other way over a longer time period, with investment trust outperforming in six out of 10 mirror portfolios over five years and nine out of 10 over 10 years.

Year to date

*To 10 August July 2020. Source: interactive investor, FE Analytics.

For six of the 10 mirror portfolios, the investment trust has underperformed the fund by around 5% or more: Fidelity Special Values investment trust (LSE:FSV) versus Fidelity Special Situations (-32.97% versus -25.11%); Standard Life UK Smaller Companies Investment trust (LSE:SLS) versus ASI UK Smaller Companies (-16.75% versus -5.18%); JPM European Smaller Companies Trust (LSE:JESC) versus JPM Europe Smaller Companies (0.3% versus 6.97%); Janus Henderson European Focus investment trust versus Janus Henderson European Focus (-8.74% versus -0.69%); Henderson Smaller Companies (LSE:HSL) versus Janus Henderson UK Smaller Companies (-26.63% versus -16.24%) and Merchants Trust (LSE:MRCH) versus Allianz UK Equity Income (-32.41% versus -24.01%).

The severity of the stock market sell-off over a five-week period in February and March has played a major role in the performance of most funds that have outperformed comparable trusts. 

When re-running the five-year performance numbers prior to the sell-off (from 1 February 2015 to 1 February 2020) nine of the 10 investment trusts performed better than the fund version. The only exception was Henderson European Focus Trust, which lagged Janus Henderson European Focus (41.5% versus 48.3%).

When looking at a longer time period of 10 years, a period that for the most part (prior to the coronavirus sell-off) was the longest bull market in history for equities, investment trusts have the edge, outperforming nine times out of 10. 

The one exception is Edinburgh Worldwide investment trust versus Baillie Gifford Global Discovery (441.09% versus 503.50%). It should be pointed out that it was not until January 2014 that Douglas Brodie took over management of the trust, so therefore the trust has not been following the same strategy and approach for the full 10 years. Brodie has managed Baillie Gifford Global Discovery since May 2011. 

It is also worth bearing in mind that while each mirror portfolio is run by the same manager following a similar strategy, some will have more overlap in terms of their holdings than others. 

Dzmitry Lipski, Head of Funds Research, interactive investor says: “Investment trusts have proven to be a terrific vehicle for long term investing and there is a growing body of evidence that shows they tend to outperformance over the long term. The ability to gear, borrow money, is a structural advantage investment trusts have over funds which, for many, has turbo charged returns during the record- breaking bull market spanning over a decade. 

“Then Covid-19 pandemic happened, and the subsequent unprecedented lockdown measures enforced by governments over the globe sent markets into freefall. In falling markets, gearing, even a small amount, has the reverse effect: enhancing losses on the way down.

“Investing is intrinsically a long-term game, and as long as you have time on your side, you can ride out the inevitable bumps in the market for a smoothed return.

“This is not to say that investment trusts trump funds more broadly. Both instruments have their advantages and disadvantages and a place within a well-diversified portfolio.” 

Over five years: funds versus trusts

*To 10 August July 2020. Source: interactive investor, FE Analytics.

Funds versus trusts: over 10 years 

*To 10 August July 2020. Source: interactive investor, FE Analytics.