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Top-performing trusts making the most of their closed-ended structure

30 October 2014

Some funds are tailor made for the closed-ended structure, while others are quasi-open ended drawing on few of the advantages of investment trusts.

ALT_TAG Mark Dampier’s comments regarding the improbable growth of investment trusts has sparked a lot of reaction from our readers, though it’s telling that closed-ended expert Charles Cade agrees that only the more specialist areas of the market will gain significant demand in the coming years.

The heads of research at Hargreaves Lansdown and Numis Securities, respectively, say that the only way mainstream UK and global equity trusts will cater for a surge in demand is if they adopt open-ended characteristics. This means using discount control mechanisms and even removing gearing, which to quote Dampier would “defeat the object” of investing in them in the first place.

Cade (pictured) doesn’t expect many mainstream launches in the coming years as a result, but thinks there will be more specialist launches of vehicles that are well-suited to the structure.

“If you look at where the growth has been, it’s been in the trusts that benefit from the structure – the yield enhancement, the longer-term view, the liquidity advantages and so on,” he said.

With this in mind, we highlight a selection of investment trusts that have thrived thanks to their closed-ended structure, boasting characteristics that open-ended investors simply can’t get access to.


Consistent income payers

For those who rely on the income from their investments to pay the bills, investment trusts boast characteristics that are extremely desirable.

Unlike open-ended funds, investment trusts do not have to pay out all of the dividends they receive. They are able to retain a proportion of their income, which means they can pay more consistent dividends that hopefully grow over time – some up to 40 years in a row.

One example is FE Alpha Manager Mark Barnett’s Perpetual Income & Growth trust. It has never cut its dividend over a calendar year since its launch in 1996, and the only year that it failed to grow its dividend was in 1999, when it kept it at exactly the same level.

The rate of growth has also been very strong – 6.6 per cent over the past five years, according to the AIC. Its dividend for the next year was 91 per cent covered as of July as well, boding well for the future.

Perpetual Income & Growth is also one of the best-performers of its kind, delivering index-beating returns over the short-, medium- and long-term. Barnett’s effective stockpicking has of course been the defining factor, but the tactical use of gearing and a narrowing discount – both only possible in a closed-ended structure – have also contributed.

Performance of trust, sector and index over 10yrs

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Source: FE Analytics

The trust is currently on a slight premium meaning that further upside thanks to the discount is unlikely.


Bargain hunters who also prioritise a growing income may be more interested by the Bankers IT. Sitting in the IT Global sector but also taking the FTSE All Share as its benchmark, the trust hasn’t performed as strongly as the Perpetual trust, though has managed to grow its dividend for 47 consecutive years, and is currently trading on a discount of 4 per cent – above its one-year average.

The trust’s dividend was more than twice covered as of July, and five year dividend growth has also been attractive, at 4.4 per cent.


Illiquid strategies


While the closed-ended structure makes it much harder for trusts to grow their assets, it does sometimes come in handy.

Open-ended managers have to contend with inflows and outflows, which means they have to put their cash to work or redeem existing positions every single day. In an asset class where liquidity is scarce, this structure is completely inappropriate.

Cade highlights physical property, infrastructure, renewable energy and private equity as the four areas that are most affected by liquidity issues.

“The underlying assets in something like renewables are very illiquid. The holdings owned are physical – things like wind farms. It’s similar to infrastructure but there isn’t the gearing.”

He points to F&C Commercial Property and the HICL Infrastructure trusts as two that have thrived. Both have only a handful of holdings – the former’s largest position is an office situated just north of Bond Street station in London while the latter has a 5 per cent position in the Dutch High Speed Rail Link – and have delivered strong risk/adjusted returns in recent years relative to equities.

Performance of trusts over 5yrs

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Source: FE Analytics

F&C is yielding 4.75 per cent while HICL is yielding 6.1 per cent, and both also benefit from the ability to smooth out their dividends.

There are currently six trusts in the IT Infrastructure Renewable Energy sector. The Renewables Infrastructure Group is the largest at £400m and also the best-performing so far in 2014.


Private equity has had an excellent run since the financial crisis, thanks in no small part to closing discounts across the board. Pantheon International IT – a trust of private equity funds – has been the best performer over the past five years, with returns of over 270 per cent. It’s currently trading on a discount of 20 per cent, having been on a discount of 60 per cent in late 2009.

Performance of trust and index over 5yrs

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Source: FE Analytics

JZ Capital Partners, which has returned 124.68 per cent over the past five years, is on the highest discount, at 32 per cent. This is higher than both its one and three year averages.

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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.