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Investment trusts versus unit trusts: who’s performed best?

Fund

Trust

Sector/manager

1 year

3 year

5 year

Sector/manager

1 year

3 year

5 year

Asia Pacific ex Japan – Aberdeen Asian equities team Aberdeen Asia Pacific (%) Aberdeen New Dawn (%)

-1.27

-1.95

59.7

81.15

82.65

90.37

UK Equity income – Neil Woodford Invesco Perpetual Income Edinburgh WorldWide

4.51

19.8

14.58

9.04

37.66

32.64

Sector/manager

1 year

3 year

Europe ex UK – Alex Darwall Jupiter European Jupiter European Opps

-3

30.41

-1.49

45.91

built into the AMC for unit trusts, costs for each may move closer together, but investment trusts will still not have the higher dealing costs associated with paying out to investors and investing new inflows. Nor do they have high initial charges. However, investors need to be wary of fixed dealing costs if they are making small regular payments into investment trusts through a broker. Many investment trust groups run regular savings schemes with very cheap bulk dealing charges to sidestep this problem.

5 year

44.52

44.63

Sector/manager

UK All Companies – Richard Buxton Schroder UK Alpha Schroder UK Growth

1 year

-0.09

1.84

3 year

30.26

19.36

5 year

23.28

10.75

Sector/manager

UK Smaller Companies – Harry Nimmo Standard Life UK Smaller Cos Standard Life UK Smaller Cos

1 year

3 year

5 year

Source: Morningstar, 16 September 2011

12.46

55.52

65.21

25.82

107.4

118.67

PERFORMANCE Performance comparisons are crude and depend on market conditions. Winterflood Securities recently pitted eight investment trust sectors against their unit trust and OEIC equivalents over 10 years. Investment trusts outperformed in every sector except Japan.

The data is illustrative but imperfect, because gearing. This is a double-edged sword; if a fund manager has borrowed and the market falls, each shareholder loses even more than they would have done with ungeared shares.

The company structure also means that investment trusts have an independent board of directors. The board appoints the investment manager, checks on their progress and may replace them if they are not up to scratch.

there are far more open-ended funds. However, it may be possible to draw firmer conclusions where open- and closedended fund versions are both run by the same manager. For example, the Aberdeen New Dawn investment trust is up 60.2% over three years, while its open-ended equivalent – the Aberdeen Asia Pacific fund – is up 49.5% over the same period (for more comparisons, see box above).

LOW COST A notable advantage of investment trusts is that they tend to be cheaper. The average total expense ratio (TER) of investment trusts is 1.53% (including performance fees), according to Lipper. But this overall average is inflated by some specialist trusts with higher annual management charges (AMCs). In contrast, the mainstream Global Growth sector has an average TER of just 1.01%, the average UK Growth trust is 1.16% and the average UK Growth & Income trust is 0.96%, according to the Association of Investment Companies. Most equivalent unit trusts have an AMC of 1.5% and the TER will usually be 0.2% higher than that. With the ending of trail commission to advisers, which is

Some trust sectors should remind investors that when an investment trust goes bad, it can go very bad. While the combination of a narrowing discount and improving NAV can be a welcome double boost for investors, the combination of a widening discount and falling NAV can make life doubly uncomfortable. For example, Peter Hewitt, manager of the F&C Managed Portfolio trusts, points out that sectors such as private equity still trade on discounts of 30% or more.

But, in general, the structure of the investment trust sector is now proving effective in delivering stronger performance. Income advantages (see box on page five) and a better ability to manage niche assets have strengthened the sector too. It could be time for investment trusts to play a bigger role in investors’ portfolios.

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SPOTLIGHT ON INVESTMENT TRUSTS | MONEYWISE 7