How 36 trusts stayed ahead of rising prices

SOME investment trusts, usually investing in a basket of shares, have a proud record of growing their share price and dividends by more than UK inflation.

Research conducted by the Association of Investment Companies has identified 36 such stock market-listed investment trusts. All of them have generated both dividend growth and share price returns in excess of 2.5 per cent per annum over the past five years – 2.5 per cent being the average annual inflation rate as measured by the Consumer Prices Index.

The list includes the likes of Merchants and Witan, trusts that have long histories of annual dividend growth going back 39 and 47 years respectively. But it also features some surprises such as Templeton Emerging Markets, Montanaro UK Smaller Companies and Fidelity Special Values that many investors tend to view as more growth-orientated trusts – rather than providing a blend of inflation-beating income growth and share price return.

Among the 36 are also specialist trusts with an investment emphasis on renewable energy (Greencoat UK Wind), private equity (Apax Global Alpha) and property (Tritax Big Box).

Annabel Brodie-Smith, communications director at the AIC, says it’s ‘encouraging’ to see such a variety of inflation-beating trusts included in the list. But she warns there is no guarantee that such performance can be repeated over the next five years.

‘Investors should do their own research and, if in doubt, consult a financial adviser,’ she says.

ANEW report published this weekend by fund platform Bestinvest highlights the need for investors to keep a close eye on their portfolios to ensure they are maximising returns. The research, published amid concerns about the impact of higher interest rates and inflation on company earnings and stock markets, shows that many investment funds are not providing value for money.

These laggards, says Bestinvest, are consistently underperforming the benchmarks they are meant to beat while still creaming in hundreds of millions of pounds in annual charges. These charges reduce returns for investors and are far higher than those levied on rival investments such as stock market-listed investment trusts and exchange traded funds.

Despite new rules by the City regulator – which require asset managers to carry out annual value assessment reports on the investment vehicles they run for retail investors – the platform says too many funds are providing poor value for money.

It also believes most wealth platforms are quite happy peddling ‘best-buy’ fund lists while doing little to warn investors away from the badly performing funds its analysis highlights. For example, in the run-up to the closure of multibillion pound fund Woodford Equity Income in June 2019, platform Hargreaves Lansdown kept it on its best-buy list despite increasing concerns about the illiquid and high risk composition of the fund’s portfolio. Hargreaves is now facing legal action over its failure to alert investors.

Jason Hollands, managing director of Bestinvest, says: ‘Investors are forever being bombarded with fund tips and the promotion of whatever investment products are riding high in the performance league tables. But the reality is that for every so-called ‘star’ fund, there are many also-rans lurking in the background that investment companies would rather not talk about.’

He adds: ‘In some cases, these are once popular funds that have fallen by the wayside. A combination of inertia and reluctance by platforms and wealth advisers to speak out about these investment duds means there are huge numbers of investors enduring sub-par returns, unaware they are getting a rum deal for the lucrative fees they are paying.’

Bestinvest’s research highlights 86 investment funds that it says are underperforming. Between them, these have combined assets of £45billion and between them levy annual fees of £463million.

The analysis is rigorous and not subjective, although it does not cover the whole investment funds market. It is focused on unit trusts and open-ended investment funds, so excludes investment trusts and exchange traded funds.

Although investment trusts and ETFs have cheaper annual charges, they are not immune from poor performance.

The report is based on analysis of three-year investment returns to the end of 2021. For a fund to be described as a laggard, it must fail two tests.

First, it must have underperformed its benchmark (chosen by Bestinvest) for each of the calendar years 2019, 2020 and 2021.

Secondly, it must have underperformed its benchmark over the whole three-year period by at least five per cent.

Halifax UK Equity Income is among the laggards. The £1.92billion fund aims to outperform the FTSE All-Share Index on a rolling three-year basis by investing in blue-chip UK companies. Yet, it has underperformed the index in each of the last three calendar years while badly underachieving over the three-year period (a 10.1 per cent return compared to a 22.9 per cent return from the FTSE All-Share).

Although Bestinvest uses the MSCI United Kingdom All Cap as a comparison benchmark for all the UK equity income funds it has analysed, the results are the same: Halifax UK Equity Income is an underperforming fund.

The biggest underachieving funds among the 86 revealed by Bestinvest are shown in the table.

Most are UK or global funds. Among them is Hargreaves Lansdown Multi-Manager Income & Growth which had 10 per cent of its assets in Woodford Equity Income at the time it was suspended.

Hollands says: ‘Every investor that has a stocks and shares Isa or a self-invested personal pension should kick the tyres on each fund, trust or share they hold. They should then ask themselves: “Is it delivering as expected or could I get a better return elsewhere?”’

The Bestinvest report is available at: bestinvest.co.uk/research/spotthe-dog.