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Questor: the first independent research confirms it – investment trusts are better
It’s official: investment trusts really do outperform ordinary, “open-ended” funds. Questor and, one suspects, many readers had always believed this, and a variety of studies had on the whole supported that view. But new academic research confirms it.
Researchers at Cass Business School, part of City University in London, found that investment trusts had typically outperformed unit trusts and other open-ended funds by almost a percentage point a year since the turn of the millennium.
If such outperformance can be repeated year after year it will make a huge difference to the eventual value of savers’ portfolios.
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Professor Andrew Clare and Dr Simon Hayley of Cass looked only at funds of both types that invested in liquid shares: they took esoteric assets such as private equity investments out of the comparison because such assets are not suited to open-ended funds.
They also took into account other issues that could have distorted the picture, such as the use of gearing and share buybacks at discounted prices, both of which are common among investment trusts, and possible “survivorship bias” – in essence, the closure of poorly performing funds flattering average returns – among the funds included.
After eliminating categories of fund not capable of comparison, the researchers ended up comparing the performance in net asset value terms, relative to the appropriate benchmark, of 134 investment trusts against 1,200 open-ended funds. The difference in numbers of funds analysed reflects the general dominance of the latter type in the asset management industry.
Cass said: “To date, there has been no independent academic research that has compared the performance characteristics of open-ended and closed-ended [investment trust] equivalents. Such a comparison is difficult because of the different structures of the two investment vehicles and because some investment trusts have few equivalents among unit trusts.
“[Our] research has made the first direct comparison between the performance of investment trusts and that of unit trusts – making the first ‘apples to apples’ comparison of their alpha [outperformance] generating record.”
It added: “Using a large sample of UK-domiciled unit trusts and investment trusts, the Cass researchers found evidence to suggest that the alpha generated by investment trust managers was, on average, higher than the alpha generated by managers of equivalent unit trusts.”
- Questor archive: telegraph.co.uk/questor
It put the average outperformance at 0.8 of a percentage point per year.
Prof Clare said: “We were quite surprised to find such a difference. Our results suggest that the structure of an investment trust, where the manager does not have to contend with constant inflows and outflows, may have led to better or more efficient investment decisions.”
Dr Hayley added: “Comparing raw investment returns across these two sectors can be misleading, since there are many factors at work. However, even after correcting for these factors, investment trusts outperformed unit trusts over this period.”
The column takes heart from the findings and will continue to seek the very best investment trusts on readers’ behalf.
Investment trust news
The board and managers of Invesco Perpetual Enhanced Income have resolved their differences and Invesco will continue to manage the trust, from which it had resigned in April.
The management fee will be 0.8pc on the first £80m of net assets, 0.7pc on the next £70m and 0.6pc thereafter. Previously the charges were 1pc, 0.7pc and 0.6pc in the same tiers. The performance fee will be scrapped.
The chairman, Donald Adamson, and Richard Williams, another board member, have resigned. Invesco will abstain from voting on the resolutions it proposed for an extraordinary meeting next month, which sought the election of two new board members.
Questor had advised selling in view of the uncertainty but investors who stuck with the trust can now hold with confidence. The shares gained 5.1pc.
Dunedin Smaller Companies has agreed to merge with Standard Life UK Smaller Companies.
Article amended to make clear that investment trust performance was assessed using net asset values