Investments: Closed-ended vs open-ended
Open-ended funds dominate the market despite the belief investment trusts perform better. If so, why aren’t they more popular? Geordie Clarke reports
If simplicity wins out over complexity, why do so many fund managers have funds on both sides of the argument? Stoakley at Schroders says the answer is straightforward. “Because the marketplace demands that some people want an investment trust and some people want a unit trust. It’s purely because of market demand,” he says.
Adding to that, Stoakley says the notion investment trusts are going to find more success once the RDR is implemented is perhaps wishful thinking given how much more popular OEICs have proved. “There’s this big view that investment trusts could grow massively beyond the RDR, but I’m not seeing it that way,” he says.
Ultimately, his view is investment trusts will perform well over one time period with specific market behaviours and open-ended funds will perform well over another time period.
Scotland at Principal Investment Management says his firm uses investment trusts sparingly because of the issues that liquidity, discounts and share price fluctuations cause. “If you have different clients with the same strategy but are investing at different times, they aren’t getting the same price point,” Scotland says. However, he concedes that there are some applications where they work very well, such as less liquid asset classes like infrastructure (as mentioned earlier).
It has long been said investment trusts produce superior performance to open-ended funds and the results in this article appear to suggest this fact. But it is not as clear-cut as some may suggest, so any notion a closed-ended fund will outstrip its open-ended counterpart by a wide margin would be false. In fact, the results found in this survey show investment trusts only performing better some of the time, and certainly not all of the time.
As fees become less of a factor and managers make moves to ensure their funds are as liquid as possible, it seems the primary differences will be related to management style and the vagaries of the market. Looking at the way the funds examined in this article performed, the results are so close to each other in many cases to render them almost negligible. When choosing between an investment trust or an open-ended fund, the decision should be less about which is supposed to produce the best returns and more about the quality of management, the need for access to a specific asset class (an investment trust may work better for specific markets) and the overall suitability of that particular investment.