What the best-performing investment trusts of the past 20 years can teach us

Forty-two trusts have risen more than tenfold over the last two decades. What made the winners stand out? And how can we identify future outperformers? Max King sifts through the evidence.

In the last 20 years, the FTSE 100 index has risen by about a third. But if dividends, based on an average yield of 3.5% per annum, are included, the total return is between 2.6 and 2.8 times. This has been enough to keep ahead of inflation, but little more. Some investment trusts have done far better.

As Ian Cowie of Interactive Investor has pointed out, no fewer than 42 trusts have multiplied investors’ money ten or more times over. They are what Fidelity’s former investment guru, Peter Lynch, called “ten-baggers”. What clues do these 42 provide for identifying the ten-baggers of the next 20 years?

Firstly, it took stubborn patience to hold these trusts throughout those 20 years. At the start, stockmarkets were halfway through the bear market that followed the technology bubble at the end of the 1990s. The period also included the 2007-2009 bear market triggered by the financial crisis, in which the MSCI World index more than halved, as well as the pandemic crash and several other sharp setbacks which, at the time, threatened to turn into something much worse. It has not been an easy time to stay invested nor will it be in the future.

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Don’t take profits too soon – or too late

Number 17 on the list with a return of over 14 times is Polar Capital Technology Trust. Twenty years ago, its shares had fallen by nearly two-thirds from the peak and they were to halve again before hitting a low a year later. Picking the best time to invest isn’t easy, and it’s always tempting to take profits too soon.

On the other hand, Aberdeen New Thai, number 13 on the list, multiplied 14-fold to a short-lived peak in April 2018, then dropped by 40% in less than a year. It made a new peak 10% above the old one in mid-2019 but now trades 33% below it. Those who didn’t take profits in April 2018 will wish they had.

This is largely due to the poor performance of the local market, but other trusts don’t have that excuse. Number nine on the list, Scottish Oriental Smaller Companies, may have multiplied investors’ money 16 times over 20 years but its five-year return, 27%, is less than half that of its competitor, Aberdeen Standard Asia Focus, number three. Its share price has risen by a factor of 21.

BlackRock World Mining has given investors the roughest ride of all. Its shares are down 25% from their spring peak but have multiplied investors’ money 12 times overall. This sounds fine, but long-term holders will remember the shares soaring to a peak in early 2008, then crashing by two-thirds. They reached a new peak in late 2010, 25% higher than the level reached last spring. At least the trust paid generous dividends, but holders will have been wise to reinvest these elsewhere.

Half-way down the list is Electra Private Equity trust, which multiplied investors’ money 12.6 times. It would almost certainly have performed better had a majority of investors not thrown it to the wolves six years ago, forcing it to sell all its investments. The treatment of Genesis, recently fired as managers of their emerging-markets trust despite multiplying investors’ money 12-fold, may also prove to have been a mistake.

Find a strong tailwind

Growing investors’ money tenfold over 20 years implies a compound annual return of 12.2%. It helps to have a tailwind behind the investment thesis and one of the strongest of these is a focus on smaller companies. Globally, smaller companies have outperformed the overall market by 5% a year over several decades; in the UK the figure is 4%. Unsurprisingly, 17 of the 42 ten-baggers have been smaller-companies specialists, and these are likely to feature prominently in the list for the next 20 years.

In most markets, smaller companies looked undervalued relative to larger ones at the start of the year but have since caught up. The exception is in the US, where the forward multiple for the S&P 600 (the small-cap index) is 15.5, compared with 16.3 for the S&P 400 (mid-caps) and 20.7 for the S&P 500. JPMorgan US Smaller Companies and Brown Advisory US Smaller Companies should do well in future.

Growth shares may look expensive in the short term but the long-term compounding effect of high growth should negate the handicap of a high initial valuation. No value fund made it into the ten-bagger list in the last 20 years and that looks unlikely to change. Value-orientated trusts may have periods of strong performance and may pay attractive dividends, but are unlikely to excel in the long term. However, many “growth” companies fall flat on their faces. Key to the success of a growth trust will be its ability to identify the relatively few companies that dominate overall returns.

Big could be beautiful

Baillie Gifford explicitly aims for this and it’s no surprise that it accounts for four of the 42 ten-baggers including number one (Scottish Mortgage, a 28.8-fold return) and number two (Pacific Horizon, 27-fold). Some of their newer trusts should excel in the future while Baillie Gifford Japan is not far short of ten-bagger status, despite the Japanese market trading sideways for at least the first ten years. Only one Japanese trust made it into the list (at number 42), but future performance should be better.

JPMorgan has six on the list and Janus Henderson, Aberdeen and BlackRock are also well represented. So there is no reason why a larger fund manager should not have a culture of investment excellence. No fund-management company has a monopoly on excellence; financial history books are littered with names that haven’t stood the test of time.

Three growth-sector specialists – two in technology, one in biotech – make the list. Healthcare trusts look likely to be great long term performers while betting against the technology sector looks dangerous. It may look expensive now, but it was in poor shape in late 2001 too, yet still delivered huge returns.

Only two private-equity trusts, HgCapital (number four, a 21-fold return) and Electra, have been ten-baggers in the last 20 years but private equity has a record of sustained outperformance of stockmarkets. The financial crisis was a huge setback but most funds recovered, learned lessons and improved business models. The number of listed funds has increased and the newcomers have performed strongly. The trend looks likely to endure.

In recent years, emerging markets have struggled – political, economic and social development seems to have stalled, if not reversed. Doubts are growing about the development path of China and several other markets. Commodity wealth has continued to be more a curse than a blessing. Yet Asia and emerging economies account for 16 ten-baggers in the last 20 years.

Perhaps the world pays too much attention to the bad news and not enough to the emergence of a growing number of successful, well-governed emerging-market companies. Growth in emerging countries continues to exceed that in developed economies, creating business opportunities for entrepreneurs. In the past, investors may have been too optimistic – but now they may be too cynical.

Attracting top talent

The ten-baggers of the next 20 years will need more than a favourable tailwind from the economies, sectors and styles they focus on. Good managers are essential but the growing success and popularity of investment trusts means that they will continue to attract the best investment talent available, which was not the case 20 years ago. Then, persistent discounts to net asset value (NAV), capital outflows and a widespread assumption that investment trusts were a relic of the past made it seem a dead-end sector.

Investment trusts have always had inherent advantages over open-ended funds, including the ability to use gearing, the supervision of an independent board of directors and, above all, the greater ease of managing a fixed pool of money. As a result, investment trusts have nearly always outperformed comparable open-ended funds, even those with the same managers investing in the same areas. The problem was getting this message across to investors.

The internet has made investment trusts far more accessible. Innovation has continued but the mis-steps of the past, such as aggressively-structured split capital trusts, have been avoided. Relaxation of the rules has enabled share buybacks, the payment of dividends from realised capital reserves and the issue of new equity without a formal offering. Non-executive directors are better qualified, more active and more willing to intervene. Management companies recognise the prestige, publicity and profitability of managing trusts instead of regarding them as a sideshow.

The competitive advantage of the investment trust structure has been enhanced by the shortcomings of an open-ended structure for investment in private equity, infrastructure, property and other illiquid assets. This ensures a steady migration of assets from underperforming, supposedly open-ended vehicles (but in practice often closed to redemption) towards investment trusts. Growth acts as a magnet.

The consequence of all this has been a steady fall in discounts to NAV to negligible levels. This has allowed equity issuance both for existing trusts and for new ones, culminating in the breakthrough year of 2020 in which the FTSE Equity Investment Instruments index outperformed the All-share index by 27.8%. The average open-ended fund underperforms its benchmark – but this is not true for investment trusts where outperformance, often by wide margins, is the rule.

That there have been 42 ten-baggers in the last 20 years is no surprise. The path of economies and markets over the next 20 years is unknowable, though it is certain that there will be many bumps, crises and bear markets along the way. The temptation to sell, whether in fear of further market losses or to cash in on gains, will be frequent but, for those who stay invested, there will be many more ten-baggers.

Max King
Investment Writer

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.

After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.