The Standard Life UK Smaller Companies trust and Lowland Investment Company have lost 15.67 and 10.27 per cent respectively this year, compared to a 9.26 per cent loss for the Standard Life UK Smaller Companies fund and a 2.16 per cent decline for Henderson UK Equity Income & Growth.
Performance of funds and trusts in 2014
Source: FE Analytics
The performance of Fidelity Special Values IT and Fidelity Special Situations has been much closer, though the former has still lost over 3 per cent more than its open-ended counterpart.
While the pairs of funds have some minor differences, they have very similar objectives and a high degree of overlap in their top-10 holdings.
The same has also been true of the Acorn Income trust and Unicorn UK Income fund, formerly managed by the late John McClure and now headed up the duo of Fraser Mackerise and Simon Moon. The closed-ended vehicle has lost 16.93 per cent year-to-date – more than 13 percentage points more than Unicorn UK Income.
In all four cases, the trusts run by Henderson, Nimmo, Wright and McClure significantly outperformed their open-ended versions in 2012 and 2013, and over the medium to long-term as well.
For example, according to FE data, the Standard Life UK Smaller Companies trust has returned a whopping 432.37 per cent over the past decade, beating its open-ended equivalent by 160.73 percentage points.
Source: FE Analytics
An FE Trustnet study last year highlighted the extent to which star managers’ trusts outperform over the long term.
So why has the trend reversed this year in some cases?
Ben Willis, head of research at Whitechurch Securities, says high levels of gearing and widening discounts have created “a double whammy” for a number of investment trust managers who have struggled with stockpicking this year.
“Because investment trusts can borrow, those that are geared and lost money this year have had a difficult time,” he explained.
“For certain markets it’s been a difficult and volatile time. When markets are rising the gearing comes in very handy, but it can have the opposite effect on the downside. Unless you are very clever and take the gearing off at the perfect time, you can get punished.”
“Because of the poorer performance, some have seen their discounts widen as well, which has added to the volatility.”
The Standard Life UK Smaller Companies trust and Acorn Income IT have a specific focus on small and mid-cap companies, which have suffered a turbulent time since March. The Numis Smaller Companies (ex IT) index is down 3.86 per cent for the year and just over 10 per cent since 6 March.
Nimmo’s trust is currently 2 per cent geared, and has fallen from being on a 2 per cent premium at the beginning of the year to a 6 per cent discount at time of writing. Mackersie and Moon’s trust is 45 per cent geared, and has again fallen from being on a slight premium to a 12 per cent discount.
Henderson and Wright’s funds and trusts are not overtly small or mid-cap focused, but do have a big bulk of their assets in FTSE 250 and FTSE Small Cap companies. Lowland and Fidelity Special Values are 14 and 25 per cent geared, respectively. Lowland was on a premium as high as 8 per cent earlier this year, but is now on a slight discount. Special Values has fallen from a 2 per cent discount to a 7 per discount.
Willis says it’s important to understand the risks of buying investment trusts – particularly following a strong period of performance. However, he points out that the closed-ended structure tends to compliment the very best stockpickers and encourages investors to look at poor periods of performance as a buying opportunity.
Referring to the underperformance of the likes of Lowland and Acorn Income this year, he said: “This is the nature of investment trusts, and why some people love them and some people don’t. You’ve got to take the rough with the smooth.”
“You’ve got to understand the intricacies of the structure, and how gearing and the discount mechanisms can work against you. It’s useful to look at the discount history and recognise how the current valuation compares to six months or a year ago.”
“If the trust is suddenly on a premium having been on a discount, that can be a risk, but sometimes the trust is on a very wide discount compared to its history.”
Acorn Income is at its cheapest from a discount point of view since the beginning of 2013. The Standard Life trust’s discount has recently narrowed slightly, but back in August was at its cheapest level since January 2012.
Willis highlights natural resources trusts such as BlackRock World Mining IT as another potentially interesting area. The trust is currently on a 9.4 per cent discount and has lost almost 44 per cent over a three-year period.
“It’s fallen considerably and had a lot of bad news. You’ve got to ask yourself just how much lower it can go,” said Willis. “Sometimes you can get the double whammy effect in a positive way – if you make the right call on an asset class, it’s a very attractive way to play it.”
While a handful of trusts have struggled versus their open-ended equivalents this year, it’s been a different story for those who have taken the volatility in their stride.
Defensively focused managers such as FE Alpha Managers Francis Brooke, Mark Barnett, Alexander Darwall and Sebastian Lyon have posted better returns with their investment trusts than their closed-ended funds in 2014.
Performance of funds and trusts in 2014
Source: FE Analytics
The open-ended funds of all four managers are in positive territory this year and outperformed their benchmarks. The likes of Brooke and Lyon have also benefited from having discount control mechanisms, which have prevented them from going onto high discounts when sentiment is on the decline.
For some asset classes, 2014 has proven to be a very positive year – even compared to 2012 and 2013 when developed market equities rallied significantly. Emerging markets and Asia Pacific have fared particularly well, posting close to double-digit returns following a disappointing year in 2013.
As a result, star managers with moderate gearing have tended to outperform their open-ended counterparts this year, further boosted by narrowing discounts. Hugh Young’s Edinburgh Dragon and Aberdeen New Dawn trusts have both made more than 11 per cent this year, outstripping the Aberdeen Asia Pacific Equity fund, which is up just over 7 per cent.
Performance of funds and trusts in 2014
Source: FE Analytics
Matthew Dobbs has also had a very good year, especially with his investment trust. The Schroder Asia Pacific trust has managed 18.23 per cent in 2014, almost doubling the returns of the Schroder Asian Alpha Plus fund.
