Trusts beat open-ended funds over last decade as RDR pressure builds

Investment trusts have substantially outperformed unit trusts and OEICs over the past decade, according to research.

The latest figures are likely to add fuel to the fire for campaigners pushing for more advisers to consider closed-ended vehicles post-RDR.

A report from broker Collins Stewart found investment trusts have outperformed their open-ended counterparts across the vast majority of equity markets. In total, eight of the nine directly comparable regional sectors outperformed on a ten-year view, with only the Japanese sector lagging.

On a NAV total returns basis (see table) the biggest outperformer was the global emerging market sector which returned 455.6%, compared to an average return of 329.8% for open-ended funds.

Meanwhile, the Asia Pacific, Global Growth, Global Growth and Income, UK Growth, UK Growth and Income, European and North American sectors all saw stronger performance from investment trusts. 

On a five year basis, investment trusts come out on top in seven of the nine regions, with the IMA UK Growth sector marginally beating its closed-ended peers.

Japanese investment trusts also underperformed against their open-ended equivalents.

Alan Brierley, investment trust analyst at Collins Stewart, said the majority of assets are tied up in the £304m J.P. Morgan Japanese investment trust, so the sector’s average return is heavily reliant on its performance.

On a short-term basis the outcome was similar, with eight of the nine closed-ended sectors outperforming. Only UK growth-focused unit trusts and OEICs outperformed.

Brierley said trusts tend to give investors a bumpier ride in volatile markets. However, he attributed the outperformance to trusts reducing gearing levels to shield capital against the turbulent market conditions.

He said the report’s findings are alarming for advisers who refuse to consider recommending closed-ended vehicles. 

“For those independent advisers who have ignored investment trusts and focused blindly on commission paying open-ended funds, the sector’s strong performance should make uncomfortable reading,” said Brierley.

“The lower total expense ratios, the ability of income trusts to use revenue reserves to smooth dividend payouts and the potential for NAV enhancements through gearing are the inherent structural advantages.”

He added despite its outperformance, the investment trust sector has only grown 33%, from £68bn to £90.3bn, over the past decade. In stark contrast, OEICs have gained 142%, from £236bn to £571bn.

“The Retail Distribution Review (RDR) should help level the playing field, as for the first time independent advisers will be required to give genuine independent advice,” he said.

However, a recent survey by investment trust broker Winterflood found 36% of its clients believe there would only be a ‘marginal’ or ‘no impact’ on the demand for investment trusts post-RDR.

John Husselbee, chief executive officer of multi-asset boutique North Investment Partners, said investment trusts do not have the sales and marketing teams to compete with OEICs.

“As an investor in investment trusts the superior performance does not surprise me and one of the key advantages is that trusts have captive assets, so the performance is not impacted by subscriptions or redemptions,” said Husselbee.

“Ultimately it is down to the investment company’s board to publicise the trust and the vast majority of fund management groups get their sales teams to focus on gathering more assets for their OEIC ranges.”

Husselbee added he only buys investment trusts over OEICs if they are trading on an attractive discount. He warned the sector’s volatility over shorter term time periods means trusts should be used to complement a portfolio and not bought on a binary basis.

Ian Sayers, director general of the Association of Investment Companies, said: 

“This research demonstrates the strong long-term performance of investment companies, with the closed-ended structure allowing managers to take a long-term view of their investments without being forced to sell to meet redemptions.

“They also have impressive income track records, with some increasing dividends for over 40 years, as well as the ability to invest in alternative assets such as private equity and hedge funds.”