The number of investment trusts appearing in the 2013 Investment Adviser 100 Club has increased to roughly 30 per cent of the individual fund members.
Comparisons with last year shows the number of investment trusts highlighted as consistent outperformers has increased from 19 in 2012 to 25 this year, an increase of 7 percentage points to 29.4 per cent of the 85-member field. In addition, seven of the 25 are returning to the list for a second year.
Ben Willis, investment manager and head of research at Whitechurch Securities, says the investment trust features that some investors find attractive – such as the closed-ended structure, real-time pricing, discount mechanism, gearing and relatively low charges – are also what lead to outperformance.
He also points out that five-year figures now cut out at least half of 2008, so this leaves roughly four-and-a-half years of positive equity markets.
Mr Willis explains: “Against this backdrop and assessing it over one year particularly, due to the closed-ended nature of investment trusts, supply has increased, leading to discounts generally narrowing. In some cases, the net asset value does not have to move that much to provide a return as long as the discount significantly narrows.
“Furthermore, those trusts that have gearing will have boosted returns as they have been able to overinvest among rising equity markets. Finally, generally speaking, investment trusts levy lower charges, so cause less of a drag on performance, enhancing longer-term returns.”
Adrian Lowcock, senior investment manager at Hargreaves Lansdown, agrees that part of the reason for the rise in investment trusts is due to timing.
He explains: “Five years ago we were entering a period where markets were heading towards their low points so it gives a good base from which fund performance can grow.
“Investment trusts have three characteristics [gearing, pricing mechanism, limited supply] that can affect performance over unit trusts and lead to short-term outperformance or underperformance. Given markets have performed strongly in the past five years, these factors will have contributed to investment trust performance.”
Ben Seager-Scott, senior analyst at Bestinvest, agrees these advantages over open-ended funds could help explain their strong showing.
“They [investment trusts] tend to have lower liquidity constraints, since they are closed vehicles, meaning they can get access to smaller companies without fear of getting caught out on liquidity – open-ended funds have to manage cashflow, and as they get larger, managers can struggle to deploy their capital in as nimble a fashion,” he says.
“Secondly, investment trusts tend to be better able to use gearing, so when the manager is feeling particularly positive about their area, they can use gearing to enhance returns – though obviously if they get it wrong, this same leverage will damage performance.”
Within the Investment Adviser 100 Club, the sectors with the most investment trust members are the Global Equity, UK Equity Income, UK Smaller Companies and the Specialist Sectors and Assets. Of these, trusts are most prominent in the UK Equity Income, UK Smaller Companies and Specialist sectors.
Mr Willis says all these sectors have been in demand from investors, particularly in the past 12 months, “as income starvation driven by the low interest-rate environment saw investors seeking government bonds and corporate bonds. However, since the opportunities in these areas have largely played out, the next step up in the risk profile and opportunity is equity income”.
But he adds: “It is interesting to note that two trusts that feature within the Specialist category are healthcare and biotech. The majority of stocks in these sectors are listed in the US.
“The US, once again, is leading the global economic recovery and this has been reflected within their equity markets, which has been in demand with investors and has seen the S&P 500 index hit a record high.”
Meanwhile, Mr Lowcock highlights that while limited supply and the discount pricing mechanism have helped improve short-term performance, the point of the club is that its consistent performance is being recognised.
“Investment trusts have some excellent fund managers and they should be recognised for their performance.
“Investors considering investment trusts should be aware of the different characteristics, such as the gearing and the additional volatility of the price versus net asset value.”
Closed-ended view - what the AIC says:
“It’s great to see that investment company representation has increased this year. It is particularly encouraging given that a number of the open-ended sectors covered in the 100 Club do not have equivalent investment company sectors – for example no bond sectors, or an absolute return sector.
“The investment company sector as a whole has had a particularly strong year, with the average investment company up 19 per cent to the end of July 2013 in share price total-return terms.
“The average investment company discount has also narrowed in the past year, almost halving from 9 per cent in June 2012 to 5 per cent at the end of June 2013. It is no surprise to see the UK Smaller companies dominating, since it is one of the top-performing sectors in the past year, and discounts have narrowed considerably, from the high teens to roughly 13 per cent.
“It is also pleasing to see so many of the retail-focused, large, liquid investment companies dominating, particularly in the Equity Income and Global Equity sector, where the investment company sector has a formidable reputation – particularly when it comes to consistent performance and growing dividends. Again, this has contributed to narrowing of discounts, and in some cases a move to premiums.
“In the specialist sectors, Private Equity and the Biotech and Healthcare sectors have had a particularly strong recent performance, again with discount narrowing, and this has again contributed to their inclusion in the 100 Club.”
The full list of 100 Club members can be found here.
