Japan investment trusts mostly in the lead

Mr Carthew says that general factors that can help investment trusts outperform open-ended funds include the fact that they do not have to hold cash to meet redemptions, and they can take on debt, known as gearing, to enhance their returns by raising extra money to invest. This is helpful when the value of the assets they invest in rises, but conversely increases their losses in falling markets.

Japanese investment trusts investing in larger companies: NAV return

Source: QuotedData based on Morningstar

NAV performance, figures over one year are annualised. Figures to end March 2015

With longer-term numbers fees may also have been a factor as historically investment trusts have had lower charges than open-ended funds, because they have never paid commission to advisers. However, following the Retail Distribution Review (RDR), this changed from January 2013 when commission payments to independent financial advisers (IFAs) selling a financial product have not been allowed. Open-ended funds have introduced cheaper share classes which in some cases are cheaper than the fees on investment trusts.

Japan investment trusts include IC Top 100 Fund Baillie Gifford Japan Trust (BGFD). Morningstar data shows that the investment trust, both in terms of its cumulative NAV and share price returns, outperforms Baillie Gifford Japanese Fund (GB0006011133) over one, three, five and 10 years.

"The overlap between Baillie Gifford Japan Trust and Japanese Fund is about 80 per cent and so the difference would be mainly for stock-specific reasons," says James Budden, marketing director at Baillie Gifford. "Also the investment trusts are geared so will do better in a rising market."

Baillie Gifford analysis at the end of December shows that the investment trust holds a greater number of small- and mid-sized companies than the open-ended fund.

Their top 10 holdings at the end of February, meanwhile, also vary.

Baillie Gifford Japan Trust currently has gearing of 13 per cent, according to Morningstar. The trust's latest factsheet said it had net liquid assets (which can include cash) of 2.1 per cent at the end of February.

Baillie Gifford Japanese Fund had cash of 0.6 per cent at the end of February.

Baillie Gifford Japanese Fund has an ongoing charge of 0.68 per cent for its 'B' shares classes, against 0.89 per cent for the investment trust. But the open-ended fund's pre-RDR share class has an ongoing charge of 1.53 per cent which would have eaten more into longer-term returns.

Smaller companies investments trusts focused on Japan don't do so well, underperforming open-ended equivalents over one and three years, and doing slightly better over five, on an annualised basis.

However, Mr Carthew, says: "Were it not for Prospect Japan (PJF), the smaller companies funds would have done even better though these funds came under some pressure last year as, globally, investors took money out of that area of the market."

Japanese investment trusts investing in smaller companies

Source: QuotedData website based on data from Morningstar

NAV performance, figures over one year are annualised. Figures to end March 2015

Japanese smaller company investment trusts include IC Top 100 Fund Baillie Gifford Shin Nippon (BGS), which has an open-ended equivalent in Baillie Gifford Japanese Smaller Companies Fund (GB0006014921). The investment trust has underperformed the open-ended fund over one year, but beats it over three, five and 10 years in terms of share price cumulative returns. It beats it over all those periods in terms of its NAV return.

The overlap between Baillie Gifford Shin Nippon and Japanese Smaller Companies is around 70 per cent, according to Mr Budden, so here too the performance differences are mainly for stock-specific reasons.

The investment trust has gearing of 8 per cent, and net liquid assets of 4.5 per cent at the end of February, while the open-ended fund has 2.6 per cent in cash. The 'B' share class has an ongoing charge of 0.62 per cent, against Baillie Gifford Shin Nippon's 1.24 per cent. However the pre-RDR share class on the open-ended fund has an ongoing charge of 1.5 per cent.

Cumulative performance

Source: Morningstar, as at 30 March 2015