Open-ended funds outshine trusts

Open-ended funds outshine trusts

The claim investment trusts usually outperform their open-ended peers has been challenged in the past year after the majority of closed-ended sectors lagged their rivals.

Analysis from Winterflood Securities found that in the 12 months to the end of November 2014, investment trusts underperformed in 10 out of 17 sectors.

The largest relative loss was seen in the Japan Smaller Companies sector, where trusts lagged their open-ended rivals by 7.8 percentage points.

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The average trust investing in smaller Japanese companies lost 4.1 per cent during the period, compared with the average 3.1 per cent rise for funds in the Investment Association Japan Smaller Companies sector.

Winterflood said the disparity was due to investors selling out of the trusts, causing the share price to plummet relative to the underlying value of the trusts’ stocks and thereby impacting returns for investors.

However, both open- and closed-ended funds significantly underperformed the Japan Small Cap index as a large proportion of the funds’ returns were wiped out by the fall in the value of the yen versus sterling.

Investment trusts within the technology sector also suffered, underperforming open-ended technology funds by 6.7 percentage points, generating a 9.5 per cent return compared with 16.2 per cent from the Investment Association Technology and Telecommunications sector.

The Winterflood report said the investment trusts had underperformed because they had lower exposure to large-cap technology stocks than their open-ended rivals.

Smaller technology stocks had been particularly struck by the sell-off in March and April 2014, while large-cap technology stocks went from strength to strength.

Other sectors in which investment trusts underperformed included Global Equity Income, UK All Companies and European Smaller Companies.

However, investment trusts beat their open-ended peers in global equities, with the average global trust outperforming the Investment Association Global sector by 4.6 percentage points.

Trusts focused on European equities also outperformed, delivering an average return of 6.8 per cent compared with a 3.2 per cent average return from funds in the Investment Association Europe sector.

But investment trusts fared even worse in the past year when compared with indices, with only six out of 16 sectors, excluding the property sector, beating its relevant index in the 12 months to the end of November 2014.

When longer time horizons are used, far more investment trust sectors beat their open-ended rivals and indices.

Winterflood found that 14 out of 17 investment trust sectors beat their open-ended equivalents in the past three years, which rose to 16 out of 17 in the past five years.

The largest outperformance in five years came from large-cap Japan funds, in which investment trusts beat open-ended funds by an average of 7.7 percentage points.

Meanwhile, 13 of the 16 sectors beat their relevant index in the past five years, while 10 sectors outperformed in three years.

However, both the three- and five-year time frames cover periods of asset price rises, during which trusts tend to outperform as they can borrow money to buy assets, known as gearing.

The performance of investment trusts against their open-ended peers