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?

A unit trust is a pot of money that any number of people can add to at any time, whereas an investment trust is a company, with a limited number of shares that can be bought and sold.

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.

Top performers

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.

Your Comments

You can't beat the consistency of the RIT fund.