A fascinating piece arrives on the difference in performance between investment trusts and unit trusts run by the same managers. FE TrustNet and Investment Week have analysed the returns made by high-profile managers who run two portfolios with similar mandates, and which have had similar top ten holdings over a period of five years.
There were 17 of them. And 15 of those did better with their investment trust than their OEIC (only Nick Train and Matthew Dobbs of Schroders got it the other way around).
Take Harry Nimmo’s Standard Life funds. His SLI ULK Smaller Companies Fund is up nearly 400% since 2003, but the almost identical trust is up 672%. Georgina Brittain at JPM has had a similar experience – her OEIC is up 212%, but her trust is up 340%. So, what makes the difference?
Over the last decade it has been all sorts of things. Charges have been generally lower on investment trusts, the ability to gear up (borrow money to invest) has helped in sharply rising markets and the trusts often have more focused portfolios (and proper active investing is one of the keys to outperformance). But the key might be that discounts have closed.
Investment trust shares very rarely trade at the exact value of their underlying investments. They trade at a discount to it (if people are worried about future performance or feel that the illiquidity of the investments reduces their value perhaps) or at a premium (perhaps if everyone is bullish on their sector or they offer a high yield).
In the past, discounts have been pretty high. Today they are not – instead they are at a record low of 3.4%*, according to the Association of Investment Companies. That’s not a problem – in fact it’s a good thing. But the closing of the discounts can’t give investment trust performance a boost twice – it’s a one off (until they fall and close again).
The same might be true of charges. RDR (retail distribution review) has meant that unit-trust fees have come down (or at least been separated from platform fees and so appear to have come down).
Finally, it is worth noting that investment trusts will have benefited from low interest rates in just the same way as other companies: they too have seen the rates they pay fall from close to double digits to 2-3%. That makes a difference – and as we all know it won’t last forever.
So, what next? From here on in, investment trusts that want to outperform will have to rely on active management skill and little else. Regular readers will know I am a great fan of investment trusts. I reckon that’s enough. But nonetheless investment trust performance over the last decade is no guide to their performance over the next.
* The nervous might like to use this number as an early warning of looming disaster. The previous low of 3.5% was recorded in 2006.