- Investment trusts have broadly outperformed in the long term
- Discounts remain in some of the most attractive sectors
We often tout the benefits of the closed-ended nature of investment trusts over their open-ended siblings, but it's only by looking at the data that you can know if their structural differences have played to their advantage.
Conventional wisdom says that smaller companies funds – across both open and closed-end funds – should have more of an advantage over their benchmarks than their large-cap peers because they operate in less well-researched areas of the market. And investment trusts have the additional benefit of being able to invest in less liquid stocks without the possibility of being faced with a slew of redemption requests, as is the risk with open-ended funds.
For UK smaller companies funds – the best-performing of the major equity fund regions over the past year – this has certainly proved the case. The UK investment trust smaller companies sector has grown a significant 58.5 per cent for the 12 months to 27 October – well ahead of its open-ended counterparts and more than twice that of the index. Over five years performance between the two fund structures is similar, however, reflecting greater volatility in investment trust performance, but their 10-year performance is comfortably better.
Fund sector / benchmark total return (%) | 1yr | 3yr | 5yr | 10yr |
IA UK Smaller Companies | 43 | 54 | 93 | 271 |
IT UK Smaller Companies | 59 | 57 | 93 | 318 |
MSCI United Kingdom Small Cap Index | 32 | 31 | 47 | 204 |
Source: FE Analytics 27.10.21, IA represents open-ended funds and IT, investment trusts |
The question now, given the strong run recently, is if UK smaller companies represent good value. Mick Gilligan, head of managed portfolio services at Killik and Co, is bullish and thinks the UK small-cap sector looks particularly cheap compared with global counterparts.
“The FTSE Small Cap Index trades on a price/book ratio of 1.37 times versus a 25-year average of 1.90 times,” Gilligan says. “This value is not lost on private equity with UK companies seeing more than $40bn of bids from private equity in the first half of this year alone.” Henderson Smaller Companies (HSL) and BlackRock Smaller Companies (BRSC) might represent the best value as they both still trade on double-digit discounts.
In the US, however, small-cap investment trusts have been less successful (although there are only two of them). The trusts have, on average, underperformed the MSCI USA Small Cap Index over three, five and 10 years while their open-ended equivalents have outperformed their benchmarks.
Fund sector / benchmark total return (%) | 1yr | 3yr | 5yr | 10yr |
IA North American Smaller Companies | 31 | 65 | 100 | 350 |
IT North American Smaller Companies | 37 | 51 | 84 | 302 |
MSCI USA Small Cap Index | 39 | 56 | 87 | 342 |
Source: FE Analytics 27.10.21 |
The performance trend has been similar for larger-cap funds. The UK All Companies investment trust sector has outperformed its open-ended peers over one, three, five and 10 years. But in North America they have lagged, as the big tech-heavy US stock index has proved hard to beat. Global active funds have also, on average, underperformed the wider index, with Scottish Mortgage Investment Trust (SMT) a notable anomaly in the sector.
Fund sector / benchmark total return (%) | 1yr | 3yr | 5yr | 10yr |
IA UK All Companies | 31 | 28 | 39 | 127 |
IT UK All Companies | 40 | 35 | 56 | 157 |
MSCI United Kingdom Index | 30 | 14 | 23 | 84 |
IA North America | 27 | 64 | 97 | 341 |
IT North America | 38 | 72 | 100 | 263 |
MSCI USA Index | 29 | 70 | 107 | 398 |
IA Global | 24 | 55 | 75 | 215 |
IT Global | 21 | 49 | 86 | 233 |
MSCI World | 27 | 56 | 80 | 269 |
Source: FE Analytics 27.10.21 |
Over to Asia and investment trusts have significantly outperformed their peers. The investment trust Asia Pacific sector has returned 240 per cent over the past decade – streams ahead of its rival Investment Association Asia Pacific sector and the MSCI Asia ex Japan sector.
However, this data is skewed by the runaway success of Pacific Horizon Investment Trust (PHT), which has had share price total return growth of 293 per cent over five years to 27 October and trades on a premium to its assets of 10 per cent. Aberdeen New Dawn (ABD), which trades on a double-digit discount and has comfortably outperformed its benchmark over one, three and five years, might represent better value.
Fund sector / benchmark total return (%) | 1yr | 3yr | 5yr | 10yr |
IA Asia Pacific Excl Japan | 13 | 49 | 52 | 151 |
IT Asia Pacific | 20 | 82 | 90 | 240 |
MSCI AC Asia ex Japan | 7 | 44 | 50 | 150 |
Source: FE Analytics 27.10.21 |
In Japan, investment trusts have comfortably outperformed peers over one, three, five and 10 years. The best-performing trust of the past five years is Fidelity Japan Trust (FJV), which currently trades on a wider-than-average discount of 7 per cent. The trend is similar for smaller-cap Japanese companies, although, unlike in the UK, smaller-cap trusts have not performed as well their larger-cap peers.
Fund sector / benchmark total return (%) | 1yr | 3yr | 5yr | 10yr |
IA Japan | 12 | 30 | 38 | 162 |
IT Japan | 16 | 44 | 70 | 325 |
MSCI Japan Index | 12 | 25 | 33 | 151 |
IA Japanese Smaller Companies | 9 | 31 | 45 | 251 |
IT Japanese Smaller Companies | 7 | 36 | 79 | 303 |
MSCI Japan Small Cap Index | 5 | 16 | 23 | 162 |
Source: FE Analytics 27.10.21 |
Technology investment trusts have also outperformed their open-ended equivalents. The table below shows how actively managed technology funds have failed to keep up with a wider global tech index – but this, to an extent, isn’t a fair comparison as some of the trusts are UK-focused. Both Polar Capital Technology Trust (PCT) and Allianz Technology Trust (ATT) have comfortably outperformed the Dow Jones World Technology Index over the past five years, but have underperformed over the past 12 months.
Fund sector / benchmark total return (%) | 1yr | 3yr | 5yr | 10yr |
IA Technology & Telecommunications | 26 | 114 | 173 | 478 |
IT Technology & Media | 18 | 83 | 180 | 608 |
MSCI ACWI/Information Technology Index | 30 | 122 | 201 | 648 |
Source: FE Analytics 27.10.21 |
Healthcare investment trusts have been particularly volatile. The Biotech Growth Trust share price, for example, has fallen 25 per cent for the year to 28 October, having risen by almost 70 per cent in the past calendar year. At the time of writing it was trading at a 7.2 per cent discount compared with a 12-month average of -1.4 per cent.
Fund sector / benchmark total return (%) | 1yr | 3yr | 5yr | 10yr |
IA Healthcare | 13 | 48 | 76 | 379 |
IT Biotechnology & Healthcare | 3 | 40 | 67 | 437 |
MSCI World Health Care Index | 16 | 48 | 75 | 344 |
Source: FE Analytics 27.10.21 |
Performance over the past decade shows that, on average, investment trusts have delivered better returns than open-ended funds in almost all sectors. But they have also delivered more volatility along the way.