Headwinds weigh on equity-focused investment trusts

Charles Cade, head of investment companies research at Numis Securities, said that investment companies with an equity mandate have been reducing fees and removing performance fees in recent years in order to remain competitive in the post-RDR environment, but added that they ultimately need to deliver strong performance and a consistent yield to prove their worth to investors.

“They need to be actively managed in order to justify fees versus passives. Increasingly, investment companies are managed on an unconstrained basis which the managers believe will offer superior long term performance than an index hugging approach,” Mr Cade said.

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Sarah Godfrey, director on investment companies at Edison, said that passive funds pose a unique risk of their own, and although they are often cheaper than active fees they still do carry a cost.

Investors that choose a passive fund risk buying it at the wrong time when the market nears its peak and a crash ensues, or picking the wrong index or market to track, she said.

“As far as the popularity of passives goes, it’s something that has historically tended to happen in a long period of rising markets. People begin to see equities as a one-way bet and therefore start to focus on [factors such as] costs as a differentiator,” Ms Godfrey said.

But even the cheapest passive fund is not free, and so investors in passives guarantee that they will underperform whatever index their fund tracks.