These vehicles have numerous advantages over their open-ended rivals, but for bullish investors who anticipate a strong run for growth businesses, investment trusts’ ability to gear – or borrow money to increase their position in a company – is likely to be of particular appeal.
This is in part the reason why investment trusts outperform open-ended funds during rising markets; according to FE data, the average UK Growth trust delivered 49.2 per cent in 2009, compared with 30.4 per cent from the average UK All Companies fund.
The fact a lot of these trusts are on wide discounts is also a plus for those who anticipate a strong run for equities. John Dodd’s Artemis Alpha trust, for example, which is the best-performing portfolio of its kind over 10 years, with returns of 420.18 per cent, is currently on a discount of 8.7 per cent.
Performance of trust vs index over 10-yrs
Source: FE Analytics
The small to mid cap-focused portfolio is far more volatile than its FTSE All Share benchmark and tends to lose more in falling markets; however, as the graph above shows, its stellar performance during up periods has more than compensated for this over the long-term.
Its record is also strong in the shorter term; according to FE data, Dodd has significantly outperformed the All Share over three and five years, with returns of 50.61 and 44.13 per cent respectively.
The manager has a hefty portion of his assets invested in oil and gas, with the top four companies in the portfolio – Hurricane Exploration, Providence Resources, Vostok Gas and Africa Oil Corp – all focused on this area.
The fund has a total expense ratio (TER) of 1.01 per cent excluding performance fees and is 14 per cent geared.
For those who want a more traditional large cap-focused option, Mark Barnett’s Keystone IT may appeal.
The portfolio holds the sort of companies held by an equity income fund, such as Vodafone, GlaxoSmithKline and AstraZeneca, but also has exposure to racier stocks that are more economically sensitive.
It has 52 per cent in the FTSE 100, 21 per cent in the FTSE 250, and the remainder is split between small caps and international equities.
Performance of trust vs index over 5-yrs
Source: FE Analytics
According to FE data, the fund has returned 259.38 per cent since Barnett took over in January 2003, significantly outperforming its All Share benchmark, with less volatility. With a one-year historic yield of 3.9 per cent, it is also one of the highest yielders in the IT Growth sector.
It is currently trading on a discount of 3.9 per cent and is 11 per cent geared.
One trust that has not had a good time of late but may still appeal is Fidelity Special Values, which is currently on a discount of 14.4 per cent.
The trust has struggled under the management of Sanjeev Shah and is up just 0.95 per cent over five years compared with 11.2 per cent from the All Share.
However, Fidelity announced earlier this year that FE Alpha Manager Alex Wright will be taking over from Shah. Wright, whose Fidelity UK Smaller Companies fund is one of the best performers in the entire IMA universe over three years, is expected to put a greater emphasis on high-growth small and mid cap stocks.
Fidelity Special Values is 14 per cent geared and has a TER of 1.21 per cent.