Proof is in the performance pudding, with new data showing that trusts beat funds in 70% of sectors over five and 10-year periods.
Here are the performance statistics that explain why I am a long-term shareholder in investment trusts - also known as investment companies - instead of open-ended funds, which include index funds.
Well, they do say the proof of the pudding is in the eating - and, when it comes to outsourcing the decision-making to a fund manager, it’s primarily about investment returns, isn’t it?
Long story short: investment companies beat funds in 70% of sectors over the last five and 10 years, according to Morningstar. Total returns from 14 out of 20 investment sectors were higher from closed-end funds than they were from open-ended ones over both those medium to long-term periods.
Investment companies did even better over the last year when, according to Morningstar, they beat funds in 17 out of 20 sectors. That’s an 85% success rate and good enough for me.
|Investment Association sector||1-year return||5-year return||10-year return||Association of Investment Companies sector||1-year return||5-year return||10-year return|
|Asia Pacific Excluding Japan||15.3||59.1||174.3||Asia Pacific||27.2||120.4||285.4|
|China/Greater China||0.8||69.5||212.3||China / Greater China||-4.7||103.5||306.0|
|Commodities and Natural Resources||36||42.2||81.1||Commodities & Natural Resources||39.0||59.7||-2.5|
|Europe Excluding UK||22.6||64.9||216.4||Europe||29.4||88.1||296.3|
|European Smaller Companies||31.2||79.3||321.8||European Smaller Companies||43.0||129.2||423.9|
|Flexible Investment||18.9||48||144.4||Flexible Investment||26.5||38.7||112.1|
|Global Emerging Markets||16.8||51.7||122.9||Global Emerging Markets||30.7||55.5||133.8|
|Global Equity Income||22.4||53.1||187.8||Global Equity Income||24.9||56.3||201.1|
|Healthcare||12.9||72.1||355.4||Biotechnology & Healthcare||2.9||62.0||453.6|
|Japanese Smaller Companies||15.5||62.6||263.1||Japanese Smaller Companies||16.2||100.8||407.5|
|North America||25.8||110.1||397.4||North America||36.3||88.6||250.5|
|North American Smaller Companies||37.2||97.6||359.9||North American Smaller Companies||41.6||93.1||359.0|
|Technology and Telecommunications||23.7||189.7||585.5||Technology & Media||15.9||246.2||733.1|
|UK All Companies||32.6||40.9||155.5||UK All Companies||52.5||73.1||249.6|
|UK Direct Property||3.9||10.9||42.3||Property - UK *||33.4||25.2||97.7|
|UK Equity Income||33||25.4||122||UK Equity Income||43.9||35.7||152.8|
|UK Smaller Companies||51||98.6||323.5||UK Smaller Companies||61.3||85.0||312.5|
Note: *Commercial/Residential/Logistics/Healthcare sectors. Source: Morningstar. All figures to 30 September 2021.
Before we go any further, I had better warn you that some dry-sounding technical terminology is unavoidable in what follows. But if, like me, you are saving and investing to pay for retirement, these technicalities could mean the difference between being able to afford your own boat or having to sit on the beach and watch other folk sail theirs. Literally.
Better still, the extent of investment companies’ medium to long-term outperformance can be eye-stretching. For example, compare and contrast - as the exam papers used to say - what the Investment Association (IA), the fund trade body, calls its ‘Technology and Telecommunications’ sector, and what the Association of Investment Companies (AIC) calls its ‘Technology and Media’ sector.
They don’t make it easy to compare apples with apples, do they? That makes it all the more important for investors to pick our way through this orchard of statistics with care, so that we can see the wood as well as the trees.
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Over the last one-year, five-years and 10-year periods to the end of last month, the average tech fund delivered total returns of 24%, 190% and 586%, respectively. All statistics are rounded to the nearest integer, or whole number, for convenience.
Whichever way you look at them, these are very impressive returns. But the average tech investment trust delivered total returns of 16%, 246% and 733% over the same periods.
So, shareholders received 25% or more total returns from the average tech investment trust or company over the last five and 10-year periods than fund holders gained from tech over the same periods. However, investors were more than a third better off in the average tech fund over the last year than they would have been in the average tech investment trust or company.
No wonder they say the devil is in the detail. Never mind all those averages, for a moment, how about some specifics? I have been a shareholder in Polar Capital Technology (LSE:PCT) for more than a decade.
Over the three standard investment periods mentioned earlier, PCT has delivered total returns of 8%, 187% and 605%, respectively. In absolute returns, this long-term investor has nothing to complain about but - as discussed in this space before - PCT’s recent relative returns leave plenty to be desired.
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Take another top 10 holding of mine by value, Worldwide Healthcare Trust (LSE:WWH) and compare the IA ‘Healthcare’ sector with the AIC ‘Biotechnology & Healthcare’ sector. WWH has actually shrunk over the last year with negative returns of 2.4%, after delivering positive returns of 72% and 464% over the last five and 10-year periods respectively.
Meanwhile, the average healthcare fund delivered 13%, 72% and 355% over the same standard periods. By contrast, the average healthcare investment company returned 3%, 62% and 454%.
Once again, the medium to long-term performance of WWH remains satisfactory but the short-term outlook is much more mixed. This raises the important point that investors should always be wary of averages.
In much the same way, we should beware of the risk involved in attempting to wade across a river that is an average of two feet deep. The explanation is that after walking through water that barely covers our ankles, we might drown in the navigable channel in the middle, which is 20 feet deep and flowing at seven knots.
Investment companies and funds, including tracker funds, deliver valuable services that include automatic diversification to diminish the risk inherent in stock markets. They all help individual investors share the cost of asset allocation - whether this involves stock selection by a sentient human being or not.
Those characteristics that investment companies and funds have in common are probably more important for many investors than the features that make them different.
Nick Britton, head of intermediary communications at the AIC, sums this up succinctly: “Investment companies tend to outperform equivalent open-ended funds over the longer term for a number of reasons.
“They can borrow money to invest, known as gearing, which adds risk but can also boost returns. They don’t need to hold low-yielding cash to meet redemptions, as open-ended funds often need to, and they can invest in assets that are hard to buy or sell quickly, such as smaller or unquoted companies, which may offer better returns.
“But perhaps the key reason for investment company outperformance is that their managers can buy or sell assets based purely on the investment case for doing so. Managers of investment companies will never have their hand forced by flows into or out of the fund, so they can take a truly long-term view of their portfolio and time their investment decisions according to their best judgement.”
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The fund industry has far more assets under management than investment companies and makes its financial muscle felt in all aspects of marketing. Money speaks all languages and can be surprisingly persuasive.
Moreover, passive-aggressive types often struggle to accept other people’s right to pursue different strategies outside tracker funds.
Meanwhile, this long-term shareholder in investment trusts continues to believe it makes sense to keep an open mind about closed-end companies - as well as the alternatives. Or, as we used to say in the City, two views make a market.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
Ian Cowie is a shareholder in Polar Capital Technology (PCT) and Worldwide Healthcare Trust (WWH) as part of a diversified global portfolio of investment companies and other shares.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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