Investing trick: Investment trusts beat funds over ten years ...

Investing trick: Investment trusts beat funds hands down over the past decade

Investment trusts have overwhelmingly beaten their fund counterparts over the past decade, with lower fees and their nimble nature playing a big part, a new report says.

Although rarely tipped by financial advisers and investing platforms, investment trusts have out-performed both their benchmarks and rival open-ended funds ? the vehicles usually punted to investors ? according to a report by broker Collins Stewart.

It said: ?For those independent advisors who have ignored investment trusts and focussed blindly on commission-paying open-ended funds, this report should make uncomfortable reading.?

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Dividend-hunting winners: Investment trusts in the UK Growth and Income sector beat their UK Equity Income fund rivals over a decade

The study found that over the past ten
years, investment trusts beat funds by a healthy margin in eight out of
nine sectors, and benchmarks in seven.

The Collins Stewart report took a comprehensive look at directly comparable investment sectors, putting investment trusts up against OEICs (Open Ended Investment Companies) and unit trusts.

The latter are favoured by financial advisers and investment platforms due to their commission payments, derived from annual management charges paid by investors on their holdings and in some cases initial charges for putting money in.

Funds v investment trusts: what does it mean

OEICs and unit trusts, commonly
referred to as investment funds, pool investors resources together into
what is called open-ended investments ? funds that grow bigger or
smaller as more people buy in or sell out and value of assets purchased
rises or fall.

On the
other hand, investment trusts, known as close-ended, have a limited
number of shares and for every buyer there must be a seller. This means
that their share price can rise independently of what is known as their
net asset value, which measures what all the assets it holds are worth.

Investment
trusts can therefore trade at a premium or a discount to their net
asset value. A premium means it costs more to buy in that the share of
assets you are getting, while a discount enables a new investor to buy
in on the cheap but means existing investors would be short-changed if
they sold up.

It said that investment trusts out-performed over most timescales, but the most telling finding was in the performance over the past decade, a volatile period which has proved sorely testing for many investors.

Dividend-hunting investors would have fared much better with investment trusts over the decade, with the UK Growth and Income trust sector returning an average net asset value (NAV) increase of 77 per cent compared to a 51 per cent average rise for funds.

Those opting for Global Growth and Income trusts did even better by comparison, with a 98 per cent average NAV return versus a 36 per cent average for funds.

The biggest win though was for those investing in higher risk sectors. Global Emerging Markets investment trusts returned an average of 357 per cent over the decade, while funds returned 230 per cent, meanwhile Global Growth trusts returned 106 per cent against a 36 per cent return for funds.

The only sector where trusts lost out over ten years was the investing graveyard that is Japan. Here trust NAVs had a 12 per cent return, while funds delivered 16 per cent. Both lagged the Japanese Topix index's 31 per cent, showing that a simple passive index tracker would have been a better investment than a managed trust or fund.

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The rivals: The full list of sectors and how investment trusts have fared against funds over one, five and ten years.

Where investment trusts have the edge

Collins Stewart said that the major advantages of investment trusts lay in lower fees and aspects that gave them more flexibility.

A leading trio of these are the ability to borrow to boost returns, using gearing, the flexibility to use share buy backs and new share issues to control share price discounts when out of favour and raise their value when in demand, and the practice of being able to smooth dividend payouts by retaining some income in good years to cover the bad.

Another major factor is that their closed-end nature, with a limited number of shares, means that for every seller there must be a buyer and vice-versa.

That means they are not distracted by investors taking money in and out and the need to manage that in terms of either having enough cash to cover withdrawals or the need to deploy large amounts of incoming cash to buy assets at a time when their price may be too high. The report said: ?For the more illiquid asset classes, chasing rapidly rising prices or being a forced seller will be a drag on returns.?

But trusts do come with downsides too

With the benefits of investment trusts though also come risks: gearing can boost returns but also lead to bigger losses when the market falls, the difference between share price and net asset value can disadvantage existing or new investors, and dealing in investment trusts can be more expensive due to share-dealing charges rather than some platforms free fund dealing offer.

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Source: http://commercial-investor.com/investing-trick-investment-trusts-beat-funds-over-ten-years/

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