Over five and 10 years investment trusts have outperformed open-ended investment companies (Oeics) and unit trusts in every core regional sector, and in most cases the outperformance is significant, according to recent research by broker Canaccord Genuity. Over 10 years, the average annualised out performance over open-ended funds and relevant benchmarks in the core regional sectors is 1.93 per cent and 1.35 per cent, respectively.
The findings follow another study conducted last year by the same author, Alan Brierley, director of investment companies at Canaccord Genuity, which found that more than three-quarters of investment trusts had outperformed their open-ended equivalents. Read more on this
Investment trusts are outperforming because they have a number of competitive advantages over open-ended funds, explains Mr Brierley.
Investment trusts typically have lower charges because they do not pay commission, eating less into the returns. This is particularly significant when compounded over the long term and has a material dilutive impact on higher-charging funds' returns.
"The ability to manage money without the distractions of daily cash flows from new monies and redemptions, often when the market is trying to execute similar orders, and the ability to invest in more illiquid investments and take a longer-term view are key features," continues Mr Brierley. "Oft-maligned, investment trusts' ability to gear (take on debt) is another tool that should enhance returns and one would like to think that the long-term return on equity will exceed the current cost of borrowing.
"Finally, the flexibility of the closed-end structure can further enhance net asset value (NAV) through the issuance of new shares at a premium or through share buybacks."
If an investment trust is trading at a discount to NAV, then these key attributes are compounded by an attractive valuation differential. Mr Brierley says that the average investment trust discount is currently 10 per cent.
10-year asset performance to 31 May 2012
Sector | Investment trusts | Oeics/Unit trusts | Benchmark |
---|---|---|---|
Global | 174.1 | 140.2 | 148.4 |
Global equity income | 187.3 | NA | 148.4 |
UK equity income | 165.2 | 146.8 | 144.1 |
UK | 178.3 | 150 | 158.1 |
North America | 139.1 | 122.6 | 142.6 |
Europe ex UK | 173.2 | 143.4 | 147.2 |
Global emerging markets | 398.9 | 298.7 | 325.6 |
Asia Pacific ex Japan | 286.7 | 247.1 | 282.2 |
Source: Morningstar/IMA/Canaccord Genuity Research