Investment Guide: closed- and open-ended investments

Published by on 08 July 2015.
Last updated on 08 July 2015


But the question on the lips of most investors - certainly beginners - is whether all of these features translate into decent performance.

In other words, do investment companies perform well enough to tempt people used to open- ended funds to try a closed-ended investment structure?

There's no quick answer to this. While unit trusts and open-ended investment companies (OEICs) seem to outperform closed-ended investment companies over the short term, it's a different story over longer time periods.

Of the 15 sectors monitored by the Association of Investment Companies (AIC), investment companies perform better than unit trusts in 11 of them, according to data to the end of March 2015. Over 10 years, investment companies perform better than unit trusts in nine of the 15 sectors.

In some sectors over these time frames, long-term investment company performance really is streets ahead.

In Japan, for example, the average investment company returned £218.9 for every £100 invested over five years, compared to just £138.6 for unit trusts. Similarly, over 10 years the UK Equity Income sector has seen average investment company returns of £273.8 compared to £209 for unit trusts.

Over five years, unit trusts only outperformed investment companies in North America, North America Smaller Companies, Global Emerging Markets, and Property. Over 10 years, unit trusts also outperformed their closed-ended peers in Japanese Smaller Companies and European Smaller Companies.

However, when you look at performance over one year, you get the opposite result, with unit trusts coming out on top in 10 of 15 sectors (although performance is equal in one of the remaining five sectors).

"Investment companies are still generally outperforming over the longer term, as would be expected," says an AIC spokesperson. "This is due to the closed-ended structure, which means that investment companies have a fixed amount of assets, in contrast to unit trusts and OEICs which expand and contract depending on supply and demand.

"Open-ended fund managers have to, therefore, manage fluctuations in the size of the fund due to inflows and outflows of money, and in tough markets can be forced to sell to meet investors' redemptions. Investment company managers however, can take a long-term view of the market and ride out any ups and downs."

That said, the AIC also acknowledges that, over shorter time periods, investment company performance suffers and returns for investors can be extremely volatile in some cases.This is, arguably, why many beginner investors (aside from investment companies being harder to understand than vanilla unit trust funds) shy away from the vehicles.

The current poor short-term performance is, the AIC says, "due to a combination of some discounts widening earlier this year in some sectors, as well as the distortive impact of certain companies in sectors with small numbers of constituents".

It says discount widening impacted the Global Equity Income, UK Equity Income, UK All Companies, North America and Global Emerging sectors and this could have affected returns. The underperformance of the Property sector is due to a more eclectic mix of stocks in the closed-ended sector, and the fact that the data is unweighted.

That may explain the current short- term underperformance but the experts have crunched the numbers over different time periods in recent decades and have usually got the same result: investment companies come out second- best in the short term.

But if short-term performance is more volatile than with open-ended funds, it's also the case that longer-term performance at any point in recent decades has been better than that offered by unit trusts.This is why managers at investment companies worry less about how their vehicles are doing in the short term and position their portfolios for the longer term – a reason why many often bounce back strongly after a downturn.

As we have explored in previous features in this series, investment companies can also borrow money (known as gearing), which also enhances performance over the long term and they have much greater flexibility in terms of the types of assets they can invest in – all reasons why investment companies have outperformed their unit trust peers in so many sectors over five and 10 years.

The statistics seem to indicate that anyone keeping their money in unit trust funds for short-term peace of mind may well miss out on longer- term riches.

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