Our data shows that the returns available from funds of trusts, have been far higher than the returns of funds of funds over both the short-, medium- and long-term.
Over 10 years, an evenly weighted portfolio of funds of trusts in the IMA universe has returned 127.87 per cent, beating its fund of funds equivalent by close to 40 percentage points.
Performance of fund of trusts vs fund of funds over 10yrs
Source: FE Analytics
Funds of trusts have also outperformed over one, three and five years.
Some of the best contributors to the portfolio have been the five crown-rated Unicorn Mastertrust, Halifax Fund of Investment Trusts and FE Alpha Manager Sean Ashfield’s Consistent Practical fund – all of which are top-quartile performers in their respective sectors over the last decade.
There are numerous reasons why investment trusts are likely to outperform open-ended funds over the long-term.
Factors such as narrowing discounts and the ability to gear, or borrow, give closed-ended funds an edge in rising markets. However, these advantages can become a hindrance when markets perform a U-turn.
The results of the study show that there were only three calendar years over the last decade in which the fund of funds portfolio beat the fund of trusts. They were 2007, 2008 and 2011.
All three of those years were tough for equities. However, it must be pointed that while there are a variety of open-ended fixed income funds, there is a dearth of investment trusts that have exposure to bonds.
Nevertheless, funds of funds have scored better than funds of trusts for maximum drawdown and annualised volatility over 10 years.
One of the major criticisms of funds of funds is that they are too expensive due to the double layer of charges.
The study showed that the average fund of funds has an ongoing charges figure (OCF) of more than 2 per cent. However, the portfolio includes fettered funds (funds that only invest in in-house products) which usually have lower fees as they can buy discounted share classes.
Funds of investment trusts on the other hand have an average OCF of 1.5 per cent.
Looking at how the top-performing funds of trusts fare against their better-known rivals is instructive.
The Unicorn Mastertrust, which is the best-performing fund of trusts over the last decade, has beaten the Jupiter Merlin Growth Portfolio and the Jupiter Merlin Income fund over 10 years with returns of 155.98 per cent, even though it fell further in the financial crash.
Performance of funds over 10yrs
Source: FE Analytics
The Unicorn fund has also beaten the two Jupiter offerings over five years, although Jupiter Merlin Growth Portfolio has beaten it over three.
Marcus Brookes and Robin McDonald’s Cazenove multi manager funds have also underperformed against out and out funds of trusts. For example, the five crown-rated Consistent Practical fund has doubled the returns of the Cazenove Multi Manager Diversity fund over three and five years.
Performance of funds over 10yrs
Source: FE Analytics
One of the main reasons why funds of investment trusts have performed so well recently is because the majority of closed-ended funds have seen their discounts narrow substantially over the last year or so.
Whether it is due to a better environment for equities or due to the impact of RDR, discounts have tightened across the board. It is especially the case for trusts that pay a dividend, as the general hunt for yield has made a number of them very expensive.
For example, Bruce Stout’s Murray International is trading on a hefty 10.4 per cent premium to NAV.
Peter Walls, who manages the Unicorn Mastertrust, says that there is a real lack of discount value left in the sector and because of that he is taking steps to defend his portfolio just in case markets tank.
Cantor’s Monica Tepes recently described the narrowing of discounts as “alarming” and says the prices of trusts demonstrate that equities are now at the top of the market.
So, despite the fact that funds of investment trusts have performed so well, should investors still be buying them now?
Charles Tan, who is also an investment companies analyst at Cantor, says that although there are pockets of value in the listed space, he advises investors to look for an open-ended version if their chosen trust is trading on a premium.
"We would agree that discounts have come in a fair bit," he said.
"The property sector, for instance, is trading on a significant premium to NAV at the moment. Similarly though, there are other areas where we think you can find relatively good value."
"We like Japan and the sector on average is trading on a 10 per cent discount, notwithstanding Baillie Gifford trusts which are trading on slight premiums, but even they were on much wider premiums earlier in the year."
"However, if you want to buy in to the investment trust sector you should look for some viable alternatives as well. There needs to be a very compelling reason to buy a trust that is trading on a premium."
"If there is a viable alternative open-ended fund that gives you the same exposure where you can buy at NAV, then that may be the best idea," he added.
