Savvy investors who have been willing to do their research have benefitted from holding investment trusts in recent years, which have by-and-large outperformed traditional open-ended funds since 2009.
Narrowing discounts and gearing have been big contributors to these strong returns, but the cheaper charges associated with trusts is also seen as one of their key advantages.
The introduction of clean share classes has seemingly wiped out this advantage however, with a number of open-ended funds now boasting ongoing charges much lower than their closed-ended rivals.
CF Woodford Equity Income, for example, which is expected to be the first multi-billion pound fund launch when it starts trading next week, has ongoing charges of 0.75 per cent, and is as cheap as 0.65 per cent on some platforms. The majority of trusts in the IT UK Equity Income sector charge more than 1 per cent, and many charge a performance fee on top of that.
However, there are some trusts that remain cheaper than anything you can get your hands on in the IMA unit trust and OEIC universe, with some boasting highly-rated managers and performance records as well. These tend to be the larger trusts available to investors, which can afford to cut their management fee.
Here are five you may wish to consider for your portfolio. None have a performance fee.
City of London IT – 0.44%
One of the largest and most established trusts in the AIC universe, Job Curtis’ £1.2bn City of London IT is a core UK Equity Income holding.
Curtis invests almost exclusively in large caps, and is seen by experts as a no nonsense way of getting exposure to the UK’s dividend market. Though it doesn’t tend to delve into the FTSE 250 or FTSE Small Cap indices, the manager has been able to add value since taking over in the early 1990s.
FE data shows that the trust is ahead of its IT UK Equity Income sector average, which is also its benchmark, over five, 10, 15 and 20 year periods.
Performance of trust, sector and index over 20yrs
Source: FE Analytics
City of London has tended to be less volatile than its benchmark as well, outperforming in times of stress. This, combined with the fact that it’s grown its dividend for more than 40 years consecutively, makes it a popular holding with cautious investors who rely on income every quarter.
With ongoing charges of 0.44 per cent, it is the cheapest mainstream trust in the AIC universe. It is on a slight premium, is 7 per cent geared and is currently yielding 3.8 per cent.
Scottish Mortgage IT – 0.5% OCF
James Anderson (pictured) is rated by many experts as the best long-term stockpicker in the business, and an unsung hero in fund management more generally. He invests with an absolute minimum time horizon of five years, but tends to hold companies much longer than this. His trust tends to be much more volatile than its peers and the FTSE All World index, falling harder in down markets; however, Anderson’s patience has been justified, and Scottish Mortgage is well ahead of the competition since he took it over in April 2000.
Performance of trust, sector and index since April 2000
Source: FE Analytics
Anderson is bullish on emerging Asia in spite of its difficult run recently. As well as having almost 20 per cent of his assets in the region, he has indirect exposure via numerous stocks such as Google, Amazon and Apple. The Chinese version of Google – Baidu – is also a top-10 holding, as is Chinese digital media company Tencent.
The 2.9bn trust is 11 per cent geared, reflecting the manager’s confidence in his long-term positions.
As well as being cheap from an OCF point of view, Bankers is on a discount of 5.5 per cent.
Bankers IT – 0.47%
Alex Crooke’s £672 trust also sits in the IT Global sector, but takes the FTSE All Share as its benchmark. It has around half of its assets in the UK, with the rest split between the US, Europe and Japan. Very little of the trust’s assets are in emerging markets.
Bankers has performed very well under Crooke since he took over just over a decade ago; FE data shows that it is ahead of both its sector and benchmark over three, five and 10 years. Over the last decade, the trust has returned 197.32 per cent, compared to 129.86 per cent from the index.
Crooke invests predominantly in large caps, with the likes of Glaxo, Apple and Shell all top-10 holdings. He isn’t afraid to take off benchmark bets however, and has significant exposure to smaller companies such as Sports Direct and Galliford Try in his top-10.
It is the joint cheapest option in IT Global, with ongoing charges of 0.47 per cent.
Temple Bar IT – 0.48% OCF
Alasdair Mundy is one of the highest rated deep value managers in the UK, and has led his £924m trust to strong performance in terms of both total return and income in recent years.
Temple Bar IT has grown its dividend 30 years in a row according to the AIC, and is ahead of the FTSE All Share over one, three, five and 10 year periods. It has also been much less volatile than its benchmark, protecting more effectively against the downside in 2008.
Performance of trust, sector and index over 10yrs
Source: FE Analytics
The manager targets out-of-favour companies that he thinks are set for a turnaround, but when he doesn’t believe there are enough opportunities he is happy to sit on cash. This willingness to sit on the sidelines helped when markets crashed in the aftermath of the Lehman crisis.
Mundy is currently sitting on 14 per cent cash, reflecting his cautious position at the moment. Big off benchmark positions include Grafton Group, Signet Jewelers and Qinetiq, which are all top-10 holdings.
Launched in 1926, the trust has grown to £924m, and can afford to have ongoing charges as low as 0.48 per cent. Mundy has been lead manager since 2002.
It is currently trading on a slight premium, and is yielding just over 3 per cent.