The top investment trusts over the past 20 years
When it comes to money, there are two things to hold on to for the long haul – your trusted source of investment information and your investments themselves. Moneywise has done its bit, supporting readers' investment decisions for 20 years, but what about your investments?
Have they delivered consistently reliable long-term performances? The answer depends on what type of investment you hold, what it's invested in and how it has been managed.
There's a strong argument that investment trusts are an excellent long-term option. This is for three reasons. First, most investment trusts have lower charges than unit trusts or open-ended investment companies (OEICs).
Years of high charges can really eat into the value of your investment, so lower charges make a significant difference to total returns over time.
Secondly, over this timeframe markets tend to rise as the economy grows, and in a rising market investment trusts tend to outperform unit trusts or OEICs.
This is partly because they have the ability to borrow in order to invest (known as gearing). If a manager believes that a particular holding will perform well, they can borrow in order to put extra money into it.
In a rising market more geared investments will do well, and overall performance should be better. The third reason for trusts' outperformance when markets rise is their two-tier structure.
How do investment trusts work?
This means if you want to buy into an investment trust, someone else usually has to sell you their shares – and vice versa.
The share value therefore moves up and down in response to demand for the trust as well as the value of its underlying assets (known as net asset value or NAV).
At any given time the shares may be trading at more than the value of the underlying assets ('trading on a premium') or, more commonly, at less than the NAV ('trading on a discount').
In a rising market, the NAV rises and demand also goes up. Generally, the discount gets smaller (known as narrowing), so investors get a double benefit in performance terms.
Remember, many of the best-performing funds are on relatively narrow discounts because they're popular. Others are on wider discounts but have usually held them fairly consistently.
When a fund has done well for the last 20 years, it's unlikely to be cheap, so investors should not expect to 'play the discount'.
In reality, the past 20 years haven't quite worked that way. The first 10 years saw huge rises in the markets to the peak of the technology boom in 2000. At that point, investment trusts were indeed outperforming.
But the tech bubble burst and dragged values down for another three years. After a rally in the middle of the decade, the global financial crisis brought markets crashing down again.
Markets have had an abnormally tough run, which means investment trusts have fared worse than unit trusts. However, the outperformance arguments still hold true for more usual periods.
Among the slightly downbeat overall figures, there have also been some spectacular performers, particularly in sectors that have outperformed over the past 20 years – revealing the impact of asset allocation.
So the two best performing trusts over 20 years are both emerging markets funds: Genesis Emerging Markets, which delivered 1,835% over the period, and Templeton Emerging Markets, which made 1,659%.
As Gavin Haynes, managing director of Whitechurch Securities, observes: "The last decade has seen global growth shifting towards emerging economies. That is reflected in investment performance."
Another impressive sector over the 20-year period is Asia Pacific, excluding Japan. Over 20 years Henderson Far East Income has delivered 1,023% and Aberdeen New Dawn 720%.
Patrick Connolly, an adviser with AWD Chase De Vere, comments that both are highly respected teams in the territory.
Haynes warns that some regional stocks, notably Chinese ones, have seen very strong rises that may not continue in the immediate future. However, he still favours the region for the long term.
Private equity trusts, which invest in unlisted companies, have also seen above-average performance.
Mark Dampier, head of research for Hargreaves Lansdown, says: "If you get private equity right it's hard to beat, and those managers who geared up in the recession of the 1990s and made the right calls are reaping the benefits."
Private equity accounts for three of the top 10 funds over the 20-year period: Graphite Enterprise, which delivered 1,595%; HgCapital, which made 1,186%; and Pantheon International Participations, up 883%.
For more risk-averse investors, the UK has traditionally been a popular option. But the best performer in the UK growth sector – Hansa Trust, which has grown 1,060% in 20 years – is by no means a conventional trust.
This fund, managed by John Alexander, has partly benefited from being a small company specialist, as these have done well recently.
Performance has also been boosted by Alexander's willingness to take large bets: for example, 40% of the fund is in a port company in Brazil.
More mainstream UK growth sector options include second-ranked Mercantile, run by JPMorgan, which has delivered 783% over 20 years. This trust has an emphasis on mid-caps, which have performed comparatively well over this period.
The top performers in the growth and income sector are Temple Bar, run by Investec, and Finsbury Growth and Income. Alistair Mundy, who manages Temple Bar, has a large-cap focus and is highly rated by Dampier.
Finsbury, meanwhile, is much more highly focused, with just 22 holdings. It's run by Nick Train, whom Dampier likens to Warren Buffett, selecting quality stocks "which he wants to hold forever".
The global growth sector contains some of the best-known and most mainstream trusts, although the top performer in the last 20 years can hardly be described as such.
RIT Capital Partners is a well-diversified global fund, which takes positions in unquoted companies as well as quoted ones.
Dampier says the second-best performer in the global growth sector, British Empire Securities, is a good candidate for more middle-ground investors, not least because it returned 1,084% in the last 20 years.
However, at the moment, it's heavily weighted towards Europe – an unusual standpoint given the recent troubles of the Eurozone.
Investment trusts are famously diverse. There are over 300 UK-listed trusts, of which around 70 are specialists, and even those populating mainstream sectors often have the freedom to take niche positions.
This holds two potential messages for investors. The first is that having such investment freedom has certainly worked for some managers, and may hold the key to exceptional performance for those willing to take the risk.
However, it's vital to understand the trust's investment mandate, the approach of the manager and the positions they're willing to take, because while these trusts will do exceptionally well if the managers' calls pay off, they stand to suffer equally badly if things go wrong.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.