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Open-ended funds dominate trusts in 2014

06 October 2014

Investment trusts tend to struggle in flat or falling markets as investors are hit by the “double whammy” of a falling NAV and widening discount; and that has been the case this year.

By Alex Paget,

Senior Reporter, FE Trustnet

The average open-ended fund in the IMA UK All Companies, UK Equity Income and UK Smaller Companies sectors has outperformed its closed-ended rival far in 2014, according to data from FE Analytics, with widening discounts playing a major part in investment trusts’ losses over the last nine months.

Investors turn to investment trusts because their structures give them an advantage, against unit trusts and OEICs, to outperform over the longer term; which has been the case over three, five, seven and 10-year periods in the UK equity space.

However, those advantages, such as discount volatility and gearing, can work against them when the wider market falls.

That certainly seems to be the case this year, as returns have been much harder to come by than in 2012 and 2013 after investors became increasingly concerned about valuations, the threat of rising interest rates and growing geo-political risks.

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Source: FE Analytics

While they considerably outperformed in last year’s bull market, our data shows that investment trusts in the IT UK All Companies, IT UK Equity Income and IT UK Smaller Companies sectors have lost more than their open-ended rivals, and their respective indices, in 2014.

That doesn’t necessarily mean active managers in the IMA sectors have covered themselves in glory, as while the FTSE All Share has returned 1.99 per cent so far this year, the IMA UK Equity Income and UK All Companies sectors have lost 0.2 per cent and 2.39 per cent respectively.

The major reason for that, according to the experts, is most open-ended funds were overweight mid and small-caps, relative to the index, at the start of the year in an attempt to add alpha; but due to various issues those are two parts of the market which have sold off this year.

Investment trusts will tend to underperform when sentiment is weak, like it is at the moment, because not only shareholders are hit by NAV underperformance, but they are hit by the “double whammy” effect of widening discounts as well.

Data from the AIC shows 75 per cent of trusts in the IT UK All Companies sector are currently trading on a wider discount to their NAV than their average discount over the last year.

The sector, as a whole, is trading on a 4.6 per cent discount, while nine of the 13 trusts in the sector have traded on premiums at points over the past 12 months.

That’s not to say there haven’t been exceptions, however.


When you combine the IMA and IT UK All Companies sectors, the best performing portfolio so far this year has been FE Alpha Manager James Henderson’s Henderson Opportunities Trust; which is up 14.13 per cent.

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Source: FE Analytics

However, those strong returns have been generated by a narrowing discount, as in NAV terms the trust has lost 0.2 per cent year-to-date.

It is currently trading on a 2.45 per cent premium to NAV, despite the fact it is genuine multi-cap portfolio, having traded on a discount of 13 per cent at points over the past 12 months.

Ewan Lovett-Turner, associate director of investment company research at Numis, says the narrowing discount is a reflection of Henderson’s strong past performance.

“Over the last three years, the trust is up over 100 per cent in NAV terms and its small and mid-cap bias will have generated a large proportion of it,” Lovett-Turner said.

“James Henderson is a very well-respected manager but, when you look back a couple of years, you could pick it up at a discount in the mid-20s. It is a relatively small trust and trading liquidity was low, but because of that performance, the NAV has since grown and now it has come onto a few more peoples’ radars.”

“I think that premium is just the recognition of good past performance.”

Both closed and open-ended UK equity income sectors have held up much better than the growth sectors this year, but again it has been open-ended funds which have outperformed.

Nevertheless, looking across both equity income sectors, four of the top 10 performing portfolios have been trusts.

They are the Miton Investment Company, Blackrock Income & Growth, Troy Income & Growth and JP Morgan Income & Capital, which have all returned more than 3.9 per cent.

None of those have been able to beat George Luckraft’s AXA Framlington Monthly Income fund, which has returned 6.74 per cent.

The fund was also a top quartile performer in the IMA UK Equity Income sector last year with returns of more than 30 per cent.

Though income trusts have, on the whole, underperformed this year, the demand for dividends is still all too clear to see.

The sector is currently trading on a tight discount of 1.3 per cent, while 10 out of the 27 portfolios in the sector are on premiums.

Smaller companies have had a difficult year in 2014 as investors have rotated out of last year’s high-multiple growth stocks and into larger, perceivably safer, companies. In that environment, it isn’t too surprising to see that small-cap trusts have struggled.

According to FE Analytics, only four out of 12 trusts have delivered a positive total return in 2014.


The sector is now trading on a 13 per cent discount, while all but three in the sector are trading on a wider discount than their one-year average.

The worst performing IT UK Smaller Companies trust so far this year has been FE Alpha Manager Harry Nimmo’s Standard Life UK Smaller Companies IT.

Performance of trust vs sector and index in 2014


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Source: FE Analytics

The trust has lost 17.12 per cent from a total return point of view and its NAV is down 13 per cent.

Its current discount is 6.82 per cent, having traded on a premium for most of last year.

One of the major reasons for that underperformance was the manager’s previously high weighting to online retailer ASOS, which he once described as his best ever investment.

The stock has fallen a staggering 67 per cent this year on the back of worse than expected sales growth. Nimmo has since exited his position, however.

Though the outlook for small-caps may be uncertain, long-term investors may consider Standard Life UK Smaller Companies’ poor share price performance as a buying opportunity, as Nimmo’s portfolio has more than doubled the returns of the Numis Smaller Companies ex IT index over 10 years with returns of 460 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.