Three in four investment trusts outperform comparable funds

17 January 2018

Investors are more likely to earn higher returns in investment trusts than in similar open-ended equity funds, according to new research.

Market maker Winterflood Securities compared 46 trusts with their 46 ‘mirror’ funds run by the same manager with the same or similar strategy. It found that over the course of a five-year period to 30 November 2017, the trusts’ net asset value (NAV) outperformed that of the equivalent mirror funds on three out of four (76%) occasions.

On average, trusts outperformed funds by 1% per year over five years, according to Winterflood.

The top outperformance over five years came from Baillie Gifford Japan Trust, which outperformed its mirror fund Baillie Gifford Japanese by 11% per year (67.1% over five years). According to Winterflood, this is because the closed-ended nature of the trust allowed the manager, Sarah Whitley, to take more buying risk. This was followed by Impax Environmental Markets (having made 28% more in NAV than its mirror fund), Schroder Japan Growth (25.4%), Invesco Asia (25%), Aberdeen Asian Smaller Companies (18.5%) and JPMorgan US Smaller Companies (18.3%).

Open-ended funds suffer from structural disadvantages that can leave them more vulnerable to market fluctuations than closed-ended trusts. Funds often suffer from capital outflows that require significant cash liquidity to mitigate. This means large sums of money in the fund can go uninvested to provide a cash buffer. It can also force fund managers to sell stocks at bad times to free up cash to improve liquidity when large outflows happen.

The closed-ended nature of investment trusts, meanwhile, means they don’t suffer from these cash flow issues as an investor is buying a stake in a company rather than providing cash for the manager to invest. Investment trusts don’t necessarily perform better than open-ended funds, but when an investor is deciding between a fund and a trust with similar attributes it would appear that often a trust can be a better option. 

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In reply to by anonymous_stub (not verified)

I'm a big fan of Investment Trusts (ITs) but I wonder if the outperformance over the last 5 years has much to do with the current bull market. ITs use 'gearing' (i.e., they can borrow additional money to use for investment), which gives them an advantage when stock markets are going up. I'd be interested in an article showing ITs vs 'mirror' funds during a period when stock markets are going down

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