Investment trusts outperform the equivalent fund 75% of the time, new research has found.
Trusts are cheaper 60% of the time, according to AJ Bell. However, beware volatility: trusts are more volatile due to gearing
Laura Suter, personal finance analyst at investment platform AJ Bell, comments: “There’s been lots of talk recently about whether investment trusts or funds are the better vehicle for investors, so we decided to crunch the numbers on comparable portfolios. There are a number of fund managers who run both a fund and an investment trust to a similar strategy, meaning we can compare the two on cost, performance and volatility to see which comes up trumps.
“Comparing these ‘dual managers’ we found that in 75% of cases the investment trust outperformed the fund, on a total return basis over a 10-year period. What’s more, in 60% of the pairings the trust was the cheaper vehicle, with a lower ongoing charges figure. On average the funds in the group cost 0.97% while the trusts cost 0.91%.
“However, investors don’t get this extra performance for free and they have to be prepared for a bumpier ride. Investment trusts have the ability to borrow money, or ‘gear’, meaning that when they are doing well their returns can be supersized, but when their investments are falling these losses could be amplified. This shows in the figures, and a whopping 90% of the time the trust is more volatile than the equivalent fund.
“One of the more famous dual managers is Nick Train, who runs both the £7.1bn Lindsell Train UK Equity fund and the £1.8bn Finsbury Growth & Income trust. The fees on the funds are almost identical (as are the top 10 holdings), but the trust’s performance has outstripped the fund, returning 498.6% over 10 years compared to 432.8% for the fund. However, over time the trust has been slightly more volatile, likely due to the gearing that the trust has, which is currently low at 1.2%.
“Another dual manager pairing is Alexander Darwall, running the Jupiter European fund and the Jupiter European Opportunities trust, although he will step down from running the fund at the end of this year and is planning to set up his own firm. This is an example where the trust is cheaper than the fund, with an OCF of 0.9% compared to 1.02% for the fund. Over 10 years the performance difference is stark, with Jupiter European returning 364% compared to 567.9% for the trust, albeit for far higher volatility.
“One pairing that bucks the trend on price is Alex Wright’s Fidelity Special Situations and Fidelity Special Values investment trust, where the latter is pricier than the fund, costing 1.05% compared to 0.91%. Despite this potential fee drag, the trust has outperformed the fund by almost 50% more over 10 years, returning 268.5% compared to 187.8%, although Wright hasn’t run the fund for that entire time.”