As a result, those investors that use the vehicles naturally revert to the biggest products available. The larger trusts are also traditionally the ones that have been around the longest, with a suitable track record to attract investors.
Big, however, is not always better. Private equity trust 3i, the biggest investment trust in the UK at £2.8bn, is fourth quartile over the past five years, recording a loss of 77 per cent, compared with its sector, which is down 10.2 per cent.
In fact, of the 10 biggest trusts in the UK only two are top quartile, including the £2.1bn Templeton Emerging Markets investment trust, which has returned 104.8 per cent in the past five years, compared with the Global Emerging Markets sector, which has returned 58.8 per cent, according to Morningstar.
The £1.9bn Scottish Mortgage trust is also top quartile, having returned 39.4 per cent in the five years to February 23, compared with the Global Growth sector, which has returned 14.7 per cent over the same period.
However, while half of the biggest 10 trusts sit in the Global Growth sector, only one in the sector is among the top 10 performers in the past five years.
That fund is the £259.8m Ruffer Investment Company, which has returned 91.6 per cent over the past half decade, making it the 10th best performing trust in that time frame.
Over five years, the top two performing trusts sit in the Asia Pacific excluding Japan sector.
The £183.2m Scottish Oriental Smaller Companies trust tops the list, having returned 133.8 per cent in the five years to February 23, compared with its sector, which returned 69.6 per cent, according to Morningstar.
The £222.7m Aberdeen Asian Smaller Companies follows in second with a return of 122.7 per cent over the same time frame.
Jackie Beard, director of closed-end fund research at Morningstar, says the outperformance of Asia excluding Japan trusts is hardly a shock.
“Seeing Asian smaller companies and/or emerging markets feature through several funds is not surprising. That is where the growth opportunities have been.”
Charles Cade, head of investment trusts at Numis Securities, adds the success of the Asia-focused trusts reflects the strong performance of the asset class, which he expects to continue in 2012.
“Interest rates are now falling or appear close to a peak in many emerging economies, and we expect a recovery in emerging markets and Asian equities in 2012,” he explains.
In spite of strong performance by Asia-focused trusts such as these that are orientated towards growth, Ms Beard expects future trust launches to centre on income, “not least because of the revenue reserve and the ability to smooth dividend payments”. She also expects more specialist trust launches, such as in the infrastructure sector, which has proved relatively popular.
Mr Cade agrees that future launches will trend towards income and specialist products, partly due to low interest rates.
“Low interest rates mean that investors continue to search for alternatives to holding cash, and so greed rather than fear will inevitably return at some stage when making investment decisions,” he says.
With interest rates set to stay low for the foreseeable future the income hunt has undoubtedly begun, but as investors continue to sit on cash, investment trusts are struggling to raise money in a tough market.
In 2011 there were only five investment trust launches, raising £526m, compared with 20 new trusts in 2010 that raised £2bn, according to Numis Securities.
The majority of launches had an income focus but even they struggled to raise money, with several groups shelving plans due to a lack of demand.
BlackRock, for example, was forced to shelve plans for a European equity trust after test marketing garnered lacklustre interest.
This waning enthusiasm comes after several high-profile launches, including that of the China Special Situations trust for Fidelity’s Anthony Bolton, had boosted the appeal of the sector in 2010.
However, the trust has underperformed, with investors seeing its share price fall by 18 per cent since the trust launched in April 2010.
In an AIC poll conducted at the end of last year, which received responses from fund managers representing £18bn of assets, 52 per cent revealed that they expected the economic backdrop to remain challenging.
An AIC spokesperson says: “2011 was a challenging year for markets, and launch activity in the investment company sector was correspondingly muted.”
While launch activity might well remain sluggish in 2012, 33 per cent of respondents support Ms Beard’s and Mr Cade’s claim that there could be demand for new specialist or income-orientated trusts.
Stephen Peters, investment trust analyst at Charles Stanley, says he expects the trend for income funds to continue.
“Equity funds launches will be rare, unless they are very niche, but I’d suggest lots more hedge funds, all with stronger discount controls. I also think there will be a trend for increased control over discounts, more RDR-friendly funds and fixed/limited lives.”
He adds that there will also be pressure on sub-scale funds to wind up. “Hopefully [that pressure] will come from traditional buyers as well as arbitrageurs.”
For investments trusts with a market capitalisation of less than £50m, pressure is mounting on their boards to return capital to investors.
Ewan Lovett-Turner, associate director for investment companies research at Numis Securities, warns pressure remains on small or poorly performing funds on wide discounts.
Nearly 30 investment trusts wound up, delisted or merged last year, but Mr Lovett-Turner said there were still numerous vehicles with a market cap of less than £50m.
“We believe that the boards of these vehicles should consider returning capital if there is no viable strategy to attract demand,” he argues.
This year, for instance, the £47.6m SR Europe fund put forward proposals to wind up and offer shareholders the option for cash or a tax-efficient rollover.
In spite of this mired outlook, it has been argued that the implementation of the RDR in 2013 will provide a boost to the investment trust sector, as it will force IFAs to give advice on the whole of the investment market, rather than just open-ended funds, while platforms come under pressure to offer investment trusts.
According to Mr Cade, the biggest impact of the RDR on the sector would be the inclusion of trusts on the fund supermarkets and wrap platforms, as well as from the transfer of assets from advisers to multi-managers or multi-asset funds.
“We believe large equity income funds will be the key beneficiaries, as well as funds offering exposure to specialist asset classes, not easily accessed via open-ended vehicles or exchange traded funds.”
However, he questions whether advisers would actually start recommending investment trusts suddenly as the “complexity of the structure” remains a deterrent.
“In addition, the industry still lacks distribution to the direct retail market. Although Fidelity was successful with its Chinese fund launch, helped by widespread media advertising, this launch was supported by trail commission, and… the support of a household name, Anthony Bolton,” he says.
“In theory, global growth funds should be attractive due to their low expense ratios, but in our view the beneficiaries are likely to be large equity income funds with solid track records, such as Murray International, City of London, Temple Bar and Edinburgh investment trust.
“These can exploit the sector’s ability to smooth dividends over the cycle.”
He also expects those with strong track records and a risk-averse invest-ment approach, such as Personal Assets and RIT Capital, to benefit, along with trusts that have specialist mandates. Much will depend, however, on whether the FSA truly forces IFAs to consider investment trusts after the RDR comes into effect at the start of next year.
Rebecca Clancy is a senior news reporter at Investment Adviser
