Swathes of FE Trustnet studies have shown how investment trusts have outperformed their open-ended rivals over the longer term.
This is mainly down to their structure. Not only do managers have the advantage of a fixed pool of capital and therefore don’t have to deal with inflows or outflows, they have the ability to gear-up in rising markets and investors can be rewarded by the “double whammy” effect of a tightening discount and NAV growth.
However, while the latter two characteristics of investment trusts mean they usually make the most of the good times, gearing and discount volatility also mean they tend to fare much worse in falling markets than unit trusts or OEICs.
Therefore, when looking to continue our series on the funds which have completely dominated their sectors, there weren’t many investment trusts which met the strict criteria.
In our past studies, each fund has to be top quartile over 10 years, outperforming over one, three and five years and must have beaten the sector in at least seven of the last full 10 calendar years.
Just as importantly, though, capital preservation is also taken into account.
Each fund has had to be outperforming for its risk-adjusted returns (as measured by its Sharpe ratio) and maximum drawdown, which shows the most an investor would have lost if they had bought and sold at the worst possible times, over 10 years.
There are a number of high profile trusts which have dominated their sectors from a total return point of view but have not offered any real downside protection – such as Scottish Mortgage IT – while others have been particular good at protecting capital but have struggled to outperform their peers, like the Ruffer Investment Company.
Nevertheless, a very select few have been able to considerably outperform their respective sectors both from total return and capital preservation perspectives.
One of which is the Perpetual Income & Growth IT, which has been headed-up by FE Alpha Manager Mark Barnett since August 1999. Barnett recently took charge of Neil Woodford’s Invesco Perpetual Income and High Income funds and FE data shows he has proven himself over the long term.
According to FE Analytics, the trust has been the third best performing portfolio in the IT UK Equity Income sector over 10 years with returns of 202.78 per cent, beating the FTSE All Share by more than 90 percentage points in the process.
Performance of fund versus sector and index over 10yrs
Source: FE Analytics
It is also among the sector’s top five performing portfolios over one, three and five years and has beaten its peers in seven out of the last 10 calendar years – the exceptions being 2005, 2006 and the strongly rebounding market of 2009.
Despite all that, it has also been one of the best for defending capital. FE data shows it has had the third best risk-adjusted returns over the past 10 years and at just 32 per cent, it has had the sector’s lowest maximum drawdown over that time.
Perpetual Income & Growth has been a very good option for income investors over the years as well – even though it currently only yields 2.95 per cent, the board have never cut the dividend since Barnett has been in charge.
Given that past performance, it isn’t surprising that the trust is trading on a slight premium to NAV.
Another trust which has dominated its peer group is FE Alpha Manager Nick Train’s Finsbury Income & Growth Trust, which also sits in the IT UK Equity Income sector.
Train, with his highly concentrated low turnover approach and focus on high quality businesses with strong franchises, is renowned for his consistent outperformance in his open-ended CF Lindsell Train UK Equity fund, which has been the only IA UK All Companies fund to have beaten the FTSE All Share and been top quartile over the last seven calendar years.
However, as the table below shows, his equivalent closed-ended fund has beaten the sector average in eight out of the last 10 calendar years. It has also beaten the FTSE All Share in nine out of the last 10 years.
Source: FE Analytics
Understandably, given that performance profile, Finsbury Growth & Income has been the best performing portfolio in the sector over a rolling 10 year period. It has returned 223.06 per cent over that time while its index is up 110.07 per cent.
It is the sector’s second best performer over three and five years and tops the tables over the past 12 months.
It must be noted that the trust’s maximum drawdown of 51 per cent places it in the third quartile, but it is still less than the sector average’s drawdown of 55 per cent. Finsbury Growth & Income also has the best Sharpe ratio in the sector over 10 years.
Like Perpetual Income & Growth, Finsbury Growth & Income has a relatively low yield of 2 per cent but has a good dividend track record, as the table below shows.
Trust’s dividend history
Source: Frostrow Capital LLP
The trust is currently on a 0.88 per cent premium but has historically traded around NAV thanks to its track record and as the board is renowned for buying back stock if the shares move onto too wide a discount.
The only other investment trust to have “dominated” their sector sits in the IT Global peer group and is also managed by Nick Train; namely the Lindsell Train IT.
FE data shows it is the best performing portfolio in the sector over one, three, five and 10 years. As a point of comparison, it has massively outperformed the MSCI AC World index over all of those time frames.
Source: FE Analytics
Except for 2009 and 2005 – when Lindsell Train IT still returned more than 23 per cent – it has beaten the sector average in each of the last 10 calendar years and has had the third lowest maximum drawdown and best risk-adjusted returns during the period in question as well.
The closed-ended fund does differ from its peers, however.
Its largest holding, for example, is Lindsell Train Limited which is unlisted and makes up close to 30 per cent of its assets. It also counts Michael Lindsell’s Lindsell Train Japan Equity fund and the 2.5 per cent consolidated loan stock, which also happens to be its benchmark, as a top 10 holding.
Given the nature of what it holds and its loyal investor base who are always hard-pushed to sell their shares, the trust has consistently traded at a premium to NAV. However, its current 22 per cent premium is the highest it has been over the past 12 months and is well above its three year average.
