However, several open-ended funds in the UK have managed to keep up with their closed-ended rivals during the rally this year that has seen the FTSE gain nearly 10 per cent.
Why investment trusts outperform
Investment trusts have the ability to gear, meaning they can borrow in order to enhance returns. Although this can lead to greater losses if markets fall, it generally means they outperform in rallies as open-ended funds can only use the capital they receive from their investors.
Equity markets have gone from strength to strength over the last few months, which has worked in trusts' favour; however there are a number of open-ended funds that have managed to keep up with them.
UK growth
Over the last six months, the five best-performing portfolios across the IMA UK All Companies and the IT UK Growth sectors are all investment trusts. The top-ranking portfolio is the Crystal Amber trust, which has returned 35.89 per cent.
Henderson Opportunities Trust and FE Alpha Manager Alex Wright’s Fidelity Special Values also made the list.
Top-performing portfolios over 6 months
| Name | 6m returns (%) |
|---|---|
| Crystal Amber | 35.89 |
| Henderson Opportunities Trust | 34.94 |
| Threadneedle UK Select Trust | 31.25 |
| JP Morgan Mid Cap IT | 29.02 |
| Fidelity Special Values | 28.56 |
Source: FE Analytics
The best-performing fund – which ranks sixth overall – is Ed Legget’s Standard Life Investments UK Equity Unconstrained, which returned 28.5 per cent over the period.
As well as taking part in the current rally, Legget’s fund is also the top-performing UK All Companies portfolio over five years, with returns of 137.45 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Although the fund’s returns are high, investors who hold it need to have some stomach for volatility: for example, it lost 20.47 per cent in 2011 and 41.05 per cent in 2008.
Legget has a flexible mandate and can invest across the UK equity market, but the portfolio is weighted towards companies that should benefit from a pick-up in the global economy.
It has 52 holdings and 60.9 per cent of its assets are invested in the FTSE Mid 250 index.
Standard Life UK Equity Unconstrained has an ongoing charges fee (OCF) of 1.9 per cent and requires a minimum investment of £1,000.
While investment trusts have taken over during the recent rally, open-ended funds dominate the list of best performers over five years, with MFM Slater Growth, Liontrust Special Situations and Cazenove UK Opportunities – which are all run by FE Alpha Managers – topping the performance tables.
UK equity income
The UK equity income market includes the IT Growth & Income and IMA UK Equity Income sectors.
Although yield-generative investment trusts have not been the best performers in the recent rally, open-ended funds have done better compared with trusts than their pure growth-focused counterparts.
FE Alpha Manager Nick Train’s Finsbury Growth & Income Trust is the top performer over six months, with returns of 24.49 per cent.
However, the other top-five portfolios include FE Alpha Manager John McClure’s Unicorn UK Income fund and PFS Chelverton UK Equity Income.
Performance of funds over 6 months
| Name | 6m |
|---|---|
| Finsbury Growth & Income Trust | 24.49 |
| Standard Life Equity Income Trust | 23.84 |
| Unicorn UK Income | 22.32 |
| The Diverse Income Trust |
22.27 |
| Chelverton UK Equity Income | 21.88 |
Source: FE Analytics
McClure’s fund has a proven track record, having been the best-performing portfolio in the IMA UK Equity Income sector over both three and five years.
Its returns of 119.33 per cent over five years are triple those of the index. The only portfolio to have beaten it over this time is Train’s Finsbury Growth & Income Trust.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Unicorn UK Income has a yield of 3.18 per cent, which McClure finds from different sources than the funds run by his peers.
Three of his largest individual holdings are the ductile cast products firm Castings, the industrial company Brammer and property business Mucklow – all of which are members of the FTSE Small Cap index.
Unicorn UK Income requires a minimum investment of £2,500 and has an OCF of 1.59 per cent.
UK smaller companies
FE Alpha Manager Alex Wright’s Fidelity UK Smaller Companies fund has been the best performer in the IMA UK Smaller Companies sector over six months, but four small cap investment trusts have beaten its returns of 26.01 per cent.
Henderson Fledgling Trust is the best-performing portfolio, with returns of 45.94 per cent; it is followed by Henderson Smaller Companies, Athelney Trust and then JP Morgan Smaller Cos IT.
As FE Trustnet revealed recently, Wright is the best-performing FE Alpha Manager over three and five years.
His four crown-rated fund is the best-performing portfolio in the sector over five years and has also beaten every IT UK Smaller Companies trust in this time.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The next best-performing portfolio – FE Alpha Manager Harry Nimmo’s Standard Life UK Smaller Companies Trust – has fallen short of Fidelity UK Smaller Companies by more than 40 percentage points over the last five years, despite the fact it can use gearing.
The five crown-rated trust’s current gearing is 10 per cent.
Fidelity UK Smaller Companies has also done well during rallies: when the markets rebounded in 2009 it returned 93.72 per cent.
Wright uses a bottom-up stockpicking approach and looks for companies that have been unfairly de-rated by the market. The fund’s two largest holdings are the pharmaceutical company United Drug and the mortgage provider Paragon Group.
The fund requires a minimum investment of £1,000 and has an OCF of 1.86 per cent.