Investment trusts’ gearing abilities make them 'clear winner'

Investment trusts’ gearing abilities make them 'clear winner'
(Pexels/Alex Chistol)

The ability of investment trusts to gear has led to the sector outperforming its open-ended counterparts, according to data.

Over the past 20 years, the AIC global investment trust sector has returned 440 per cent on average, compared with the IA Global’s 329 per cent, according to Interactive Investor.

The biggest gap between open-ended funds and investment trusts was in the Asia Pacific sector, where the relevant AIC sector saw a 1,174 per cent return over 20 years, compared to the IA’s Asia Pacific Excluding Japan sector, which returned 553 per cent.

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The ability of investment trusts to borrow money to enhance their returns has long been considered a reason for investment trusts outperforming open-ended funds in periods of rising markets.

Although gearing explains some of the outperformance, there are other factors at play, said Nick Britton, head of intermediary communications at the Association of Investment Companies.

“What also helps performance is the closed-ended structure of investment companies, which allows managers to buy and sell assets at a time of their choosing, rather than when investors buy or sell shares in the fund,” he said. 

This structural difference also allows investment companies to access less liquid parts of the market, such as smaller companies and unquoted companies, which can expand a manager’s opportunity set and enhance long-term returns, he added.

However, these qualities can equally drag on a trust’s performance when markets dip.

Indeed, data from Interactive Investor shows over the past year, as markets have wobbled, the AIC global sector has lost 23 per cent, compared with the IA Global funds sector losing 15 per cent. 

This has pushed the IA Global sector to return 41 per cent over the past five years, compared to investment trusts returning 24 per cent.

Britton said: “When markets reverse investment companies tend to more than make up for this, which is why we see such strong performance over longer periods.”

Head of funds research at Interactive Investor, Dzmitry Lipski, said although it is interesting to compare performance, investors should be aware of the different sizes of the sectors.

“The investment trust industry is smaller than the funds industry – so has fewer competitors in the field,” he said. 

“Even so, it’s very clear that over the very long term and during volatile periods, there can be some clear differences in the way each behaves.

“This data illustrates loud and clear that investors should keep an open mind, and they don’t have to choose between funds and trusts – you can have a mix of both.”

Investor holdings

Data compiled earlier this year showed that adviser inflows to investment trusts rose to a record £1.3bn in 2021, a rise of 23 per cent year on year.

Net demand for investment companies, which is purchases minus sales, was £320mn in 2021, an increase of 29 per cent on the previous year, according to the AIC.