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UK funds celebrate stronger start to 2015 than investment trust rivals

10 April 2015

Despite the strong start to UK equities in 2015, the average investment trust has lagged its rivals in the open-ended space as discounts continue to widen

By Lauren Mason,

Reporter, FE Trustnet

UK growth and income open-ended funds have far outperformed the average investment trust so far this year, as close-ended funds’ discounts continue to widen.

Despite an impending general election which has been described as the most unpredictable in a generation, the FTSE 100 managed to surpass 7,000 for the first time and broke through a huge psychological barrier.

Meanwhile, as shown in the graph below, the average trust returns in both the UK All Companies sector and the UK Equity Income sector are almost half that of open-ended funds over 2015 so far.

Performance of IT and IA UK All Company sectors and UK Equity Income sectors over 2015

 

Source: FE Analytics

There’s no doubt that investor confidence has increased over the past few months and this can be seen through the rising value of stocks and shares. So why are the discounts of closed-ended trusts widening?

Data from the AIC shows that 12 out of 13 trusts from the UK All Companies sector and 21 out of 26 trusts from the UK Equity Income sector are currently trading at a discount. What’s more, many of these are trading on wider discounts than their three-year averages.

In an article last month, Winterflood head of research Simon Elliot told FE Trustnet that the widening discounts suggest a degree of nervousness creeping into investors’ views on UK equities.

“I think is more a call on the UK market more than anything else because, with the FTSE reaching 7,000, investors are starting to get a bit concerned about valuations. However, if you can take a longer term view, I think now is a good time to look closely at the sector,” he said.

Looking at the trusts with the highest discounts, Artemis Alpha Trust is trading at a 19.12 per cent discount, which is more than twice the discount of its three-year average.

Similarly, Henderson Opportunities Trust is also trading at twice the discount of its average and is currently at an 11.48 per cent discount.


However, it’s not all doom and gloom. Despite the huge discount, James Henderson’s £31.7m trust has had total returns of 12.83 per cent since the start of the year, which is almost triple the average total return of its peers.

Performance of trust vs sector and benchmark since 2015

 

Source: FE Analytics

The trust, which is in the IT UK All Companies sector, has a dividend yield of 1.4 per cent and is 17 per cent geared.

Another trust with a relatively strong start to the year is Invesco Perpetual Select UK Equity. It has returned 10.33 per cent since the start of the year, compared with a rise in the FTSE All Share of about 8 per cent. It is trading at a much smaller discount of 0.83 per cent.

The four FE Crown-rated trust, which focuses on achieving an attractive long-term total return, has been managed by FE Alpha Manager Mark Barnett since its launch in 2006.

Invesco Perpetual Select Trust has a gearing ratio of 15 per cent and a dividend yield of 3.1 per cent.

When it comes to the open-ended sectors, the top-performing fund in the UK All Companies sector is Baillie Gifford UK Equity Alpha, boasting total returns of 13.67 per cent, which is almost double the average performance of its peers and the FTSE All Share Index.

Performance of fund vs sector and benchmark since 2015

Source: FE Analytics

The fund, managed by Gerard Callahan since 2010, has been awarded a Square Mile rating of ‘A’. It is highly-concentrated and typically consists of between 30 and 40 holdings, nearly a quarter of which are weighted in the services sector.

Despite Callahan having a long-term focus, the fund has under-performed its sector and benchmark over 10 years by 13.91 percentage points and 11.96 per cent respectively.


Square Mile said: “The focus on quality and growing businesses ought to produce returns ahead of the market over a reasonable holding period.”

“However, its high conviction approach, more specific investment criteria and limited regard for the benchmark may lead to periods where performance struggles versus the wider market.”

Baillie Gifford UK Equity Alpha has a clean ongoing charges figure (OCF) of 0.68 per cent and yields 1.47 per cent.

Within the UK Equity Income sector, the five FE Crown-rated Majedie UK Income fund comes out on top.

Managed by Yuri Khodjamirian and FE Alpha Manager Chris Reid, the fund has achieved total returns of 12.71 per cent since the start of the year, beating its benchmark and peer average.

Performance of fund vs sector and benchmark since 2015

Source: FE Analytics

The £878m fund is in the FE Research Select 100 list and has an impressive track record, appearing in the top quartile of its sector in 2012, 2013 and 2014.

The FE research team said: “Reid focuses on creating a high conviction portfolio by picking companies that are often unloved by the market, but undergoing a positive transformation, while still paying out an acceptable dividend to investors.”

“This allows the fund to benefit from income and also capital appreciation as market prices react to the improvements being made.”

Majedie UK Income has a clean OCF of 0.78 per cent and yields 3.1 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.