We compare the performance of 12 managers running an investment trust and a fund using a similar strategy.
Investment trusts have performed worse than similar open-ended strategies this year as markets have tumbled due to Russia’s invasion of Ukraine, inflation, and higher interest rates.
The use of gearing (or borrowing) by trusts magnifies losses as well as gains, causing them to drop more than similarly managed open-ended funds when markets fall but rise more when they go up.
Investment company share prices also trade separately to the value of the investments (the net asset value, or NAV), meaning that wide discounts often open when markets drop.
Interactive investor analysis of 12 pairs of similarly managed investment trusts and funds showed that over one month and three months funds were better performers.
Since February, six out of 12 funds beat their sister trusts and one returned the same amount. Since December 2021, 10 out of 12 funds beat their trust peer. All data is to 17 March 2022.
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In this three-month period, only Nick Train’s Finsbury Growth & Income (LSE:FGT) beat its fund alternative LF Lindsell Train UK Equity, and Polar Capital Technology (LSE:PCT) beat Polar Capital Global Technology.
However, performance was equal over three years, and over five and 10 years trusts began to beat similar funds.
At the five-year mark, six out of 11 trusts beat their fund equivalents and at 10 years eight out of 11 did. The trusts that failed to beat their alternative over 10 years were Edinburgh Worldwide (LSE:EWI) (versus Baillie Gifford Global Discovery), abrdn UK Smaller Companies Growth (LSE:AUSC) (versus ASI UK Smaller Companies) and Finsbury Growth & Income (LSE:FGT) (versus Lindsell Train UK Equity).
|Fund||Trust||Fund performance 1 month (%)||Trust performance 1 month (%)||Fund performance 3 mths (%)||Trust performance 3 mths (%)||Fund performance 3 years (%)||Trust performance 3 years (%)||Fund performance 5 years (%)||Trust performance 5 years (%)||Fund performance 10 years (%)||Trust performance 10 years (%)|
|Fidelity Special Situations||Fidelity Special Values||-4.46||-4.46||-2.97||-1.53||11.64||20.28||18.34||40.95||132.81||233.9|
|Baillie Gifford Global Discovery||Edinburgh Worldwide||-6.56||-9.19||-20.1||-28.69||14.17||15.49||69.87||89.73||309.23||270.68|
|JPM Europe Smaller Companies||JPMorgan European Discovery||-3.36||-6.99||-13.26||-17.93||36.01||30.01||46.05||43.3||230.38||246.02|
|Troy Trojan Income||Troy Income & Growth||-0.5||-0.4||-7.05||-8.7||5.34||5.15||8.17||10.86||88.43||88.91|
|ASI UK Smaller Companies||Abrdn UK Smaller Companies Growth Trust||-4.76||-8.23||-15.11||-18.57||37.41||36.15||68.2||60.03||237.73||231.94|
|Janus Henderson European Focus||Henderson European Focus Trust||-4.21||-8.24||-7.26||-11.07||36.5||31.01||40.32||25.19||185.88||212.82|
|Janus Henderson UK Smaller Companies||Henderson Smaller Companies||-5.2||-7.41||-12.23||-15.72||27.54||26.55||47.22||59.17||216.08||286.95|
|Lindsell Train UK Equity||Finsbury Growth & Income||-2.92||-2.59||-8.18||-7.7||13.3||7.11||35.17||31.23||191.75||189.24|
|Fidelity European||Fidelity European Trust||-1.31||-4.45||-7.43||-9.49||35.34||44.96||57.33||75.08||168.83||224.26|
|Allianz UK Listed Equity Income||Merchants Trust||-4.57||-3.3||0.23||1.73||35.62||36.27||46.38||53.09||127.05||145.41|
|Baillie Gifford American||Baillie Gifford US Growth Trust||-10.28||0||-30.76||-30.46||59.14||78.52||142.8||431.07|
|Polar Capital Global Technology||Polar Capital Technology Trust||-6.86||-3.06||-18.86||-16.16||61.52||77.03||133.18||132.7||454.66||467.63|
Source: FE FUNDINFO, 17 March 2022.
The results show that for investors able to stomach volatility and sit tight for more than five years, trusts have been the better investment option.
The Association of Investment Companies (AIC), a trade body, found that differences in return was not limited to similar funds and trusts. It calculated that in the 10 years to October 2021 the average investment company returned 265%, while the average open-ended fund returned 70%.
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Aside from gearing, there are other reasons investment trusts performed better than open-ended funds.
The AIC said: “Investment company managers are more likely to have higher exposure to smaller companies than their open-ended counterparts, who need to consider how easy it would be to liquidate their investments if investors in the fund wanted to redeem their units. Smaller companies tend to outperform large ones over the long term, as shown by many academic studies.
“Open-ended funds need to buy assets when investors buy units in the fund, and sell assets when investors want to redeem units. This can force a fund manager’s hand. The managers of closed-ended funds have much greater freedom in timing their buy/sell decisions and can take a long-term view.”
What is gearing?
Investment trusts are allowed to gear, or borrow, to invest. This can improve their performance, but it means they tend to be more volatile than their open-ended peers. Gearing in a rising market magnifies gains for each shareholder; but if the market falls, investors in a geared trust will suffer greater losses per share.
Simply put, if the manager borrows X to invest and the trust grows, the manager has to repay X plus interest, but retains the investment growth as part of the trust’s net asset value. So, if you have £1,000 invested (let’s assume a constant share price for now) and the manager gears by 10%, then there is effectively £1,100 working for you.
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Now, if that doubles in value to £2,200, the manager pays back the £100 plus, let’s say, 1% interest. That leaves you – the investor – with £2,099. If the manager had not geared, you would have only £2,000.
Conversely, if the same investment halves in value to £550, the manager still has to pay back £101. This magnifies the losses, leaving you with only £449 instead of the £500 you would have without gearing.
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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.