QuotedData’s head of research James Carthew has backed investment trusts to outperform over the long term, but warned that investors would have a bumpy ride.
Mr Carthew said that over the past 10 years investment trusts had consistently outperformed the benchmark, and 61 per cent of the global investment company sector had beaten the MSCI World Index.
In the same period, 95 per cent of the UK equity income investment company has beaten the FTSE 350 High Yield Index.
Mr Carthew said: “Of course, investment companies have a tendency to perform well during the good times, because they can ‘gear up’ to boost returns, but can suffer more during times of volatility.
“If markets rise and performance is good, returns will be enhanced – the borrowing can be repaid, with a profit on top.
“But in falling markets, gearing will magnify losses, too. So while investment companies will tend to outperform over the long term, investors may experience a bumpier ride along the way.
“However, the average investment company is currently 7 per cent geared – relatively modest, although some sectors and companies are more highly geared than others.”
Mr Carthew’s research also showed that in the last 10 years 77 per cent of the UK smaller companies sector had beaten the FTSE Small Cap while 100 per cent of the Europe sector had beaten the MSCI Europe ex UK Index.
A spokesman for the Association of Investment Companies said: “This research is a good testament for active management within the closed-ended investment company structure.
“It illustrates the sector’s tendency to outperform over the long term, with structural features such as gearing boosting returns in a rising market.
“On the flip side, it also means that in more volatile markets investors may get a bumpier ride along the way.”
Adviser view
Graeme Inglis, director of Kirkcaldy-based Create and Prosper Financial Services, said: “We tend not to use investment trusts because of the volatility.
“How they perform over the long term depends on each investment trust.”
