The first in­de­pen­dent re­search con­firms it: in­vest­ment trusts are bet­ter

An aca­demic study has con­cluded that in­vest­ment trusts tend to out­per­form their unit trust ri­vals

The Daily Telegraph - Business - - Business - Richard Evans

IT’S of­fi­cial: in­vest­ment trusts re­ally do out­per­form or­di­nary, “open-ended” funds.

Questor and, one sus­pects, many read­ers had al­ways be­lieved this, and a va­ri­ety of stud­ies had on the whole sup­ported that view. But new aca­demic re­search con­firms it. Re­searchers at Cass Busi­ness School, part of City Univer­sity in Lon­don, found that in­vest­ment trusts had typ­i­cally out­per­formed unit trusts and other open-ended funds by al­most a per­cent­age point a year since the turn of the mil­len­nium. If such out­per­for­mance can be re­peated year af­ter year it will make a huge dif­fer­ence to the even­tual value of savers’ port­fo­lios. Pro­fes­sor An­drew Clare and Dr Si­mon Hay­ley of Cass looked only at funds of both types that in­vested in liq­uid shares: they took es­o­teric as­sets such as pri­vate eq­uity in­vest­ments out of the com­par­i­son be­cause such as­sets are not suited to open-ended funds.

They also took into ac­count other is­sues that could have dis­torted the pic­ture, such as the use of gear­ing and share buy­backs at dis­counted prices, both of which are com­mon among in­vest­ment trusts, and pos­si­ble “sur­vivor­ship bias” – in essence, the clo­sure of poorly per­form­ing funds flat­ter­ing av­er­age re­turns – among the funds in­cluded.

Af­ter elim­i­nat­ing cat­e­gories of fund not ca­pa­ble of com­par­i­son, the re­searchers ended up com­par­ing the per­for­mance, rel­a­tive to the ap­pro­pri­ate bench­mark, of 134 in­vest­ment trusts against 1,200 open-ended funds. The dif­fer­ence in num­bers of funds an­a­lysed re­flects the gen­eral dom­i­nance of the lat­ter type in the as­set man­age­ment in­dus­try. Cass said: “To date, there has been no in­de­pen­dent aca­demic re­search that has com­pared the per­for­mance char­ac­ter­is­tics of open-ended and closed-ended [in­vest­ment trust] equiv­a­lents. Such a com­par­i­son is dif­fi­cult be­cause of the dif­fer­ent struc­tures of the two in­vest­ment ve­hi­cles and be­cause some in­vest­ment trusts have few equiv­a­lents among unit trusts.

“[Our] re­search has made the first di­rect com­par­i­son be­tween the per­for­mance of in­vest­ment trusts and that of unit trusts – mak­ing the first ‘ap­ples to ap­ples’ com­par­i­son of their al­pha [out­per­for­mance] gen­er­at­ing record.” It added: “Us­ing a large sam­ple of UK-domi­ciled unit trusts and in­vest­ment trusts, the Cass re­searchers found ev­i­dence to sug­gest that the al­pha gen­er­ated by in­vest­ment trust man­agers was, on av­er­age, higher than the al­pha gen­er­ated by man­agers of equiv­a­lent unit trusts.”

It put the av­er­age out­per­for­mance at 0.8 of a per­cent­age point per year.

Prof Clare said: “We were quite sur­prised to find such a dif­fer­ence. Our re­sults sug­gest that the struc­ture of an in­vest­ment trust, where the man­ager does not have to con­tend with con­stant in­flows and out­flows, may have led to bet­ter or more ef­fi­cient in­vest­ment de­ci­sions.” Dr Hay­ley added: “Com­par­ing raw in­vest­ment re­turns across these two sec­tors can be mis­lead­ing, since there are many fac­tors at work. How­ever, even af­ter cor­rect­ing for these fac­tors, in­vest­ment trusts out­per­formed unit trusts over this pe­riod.”

The col­umn takes heart from the find­ings and will con­tinue to seek the very best in­vest­ment trusts on read­ers’ be­half.

In­vest­ment trust news

The board and man­agers of In­vesco

Per­pet­ual En­hanced In­come have re­solved their dif­fer­ences and In­vesco will con­tinue to man­age the trust, from which it had re­signed in April.

The man­age­ment fee will be 0.8pc on the first £80m of net as­sets, 0.7pc on the next £70m and 0.6pc there­after. Pre­vi­ously the charges were 1pc, 0.7pc and 0.6pc in the same tiers. The per­for­mance fee will be scrapped.

The chair­man, Don­ald Adam­son, and Richard Williams, an­other board mem­ber, have re­signed. In­vesco will ab­stain from vot­ing on the res­o­lu­tions it pro­posed for an ex­tra­or­di­nary meet­ing next month, which sought the elec­tion of two new board mem­bers.

Questor had ad­vised sell­ing in view of the un­cer­tainty but in­vestors who stuck with the trust can now hold with con­fi­dence. The shares gained 5.1pc.

Dunedin Smaller Com­pa­nies has agreed to merge with Stan­dard Life UK Smaller Com­pa­nies. Read Questor’s rules of in­vest­ment be­fore you fol­low our tips: tele­ questor­rules; twit­

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