While they can often be more volatile and higher risk, historical data has shown that closed-ended funds have seemingly always outperformed their open-ended rivals over the long term.
Of course, the past is no guide to the future but investment trusts’ structures, their ability to gear and the chance of a tightening discount certainly give them an advantage over the average unit trust or OEIC.
FE Analytics shows, for example, that the average trust in the IT UK equity sectors has beaten the FTSE All Share by 100 percentage points over the past 15 years and has outperformed the average open-ended fund close to 45 percentage points.
Performance of portfolios versus index over 15yrs
Source: FE Analytics
For those looking to tap into that theme, Investment Trust Intelligence – an online quarterly report published by Kepler Partners – has built its second portfolio of closed-ended funds (following on for its ‘bullet-proof income’ portfolio) for investors who are targeting superior growth over the long term.
In this article, FE Trustnet takes a closer look at the five trusts which have made the grade within the ‘Endurance Growth Portfolio’, which not only offer “outstanding long-term growth prospects” but give investors heaps of diversification as well.
Edinburgh Worldwide Investment Trust
First on the list is the Edinburgh Worldwide Investment Trust, which is headed up the FE Alpha Manager duo of Douglas Brodie and John MacDougall and concentrates on global smaller companies.
William HeathcoatAmory, founding partner at Kepler, says the trust’s focus on innovative companies that are aiming to disrupt their relevant sectors makes it a great choice for long-term investors.
“Edinburgh Worldwide’s board has a vision which perfectly encapsulates its attraction to us as a member of the endurance growth portfolio. The company’s object is to be invested in ‘the smaller businesses most likely to shape the world in which we live’,” Heathcoat Amory said.
“This is no modest boast, but we believe the investment horizon the managers will be employing stands them apart from many of their competitors.”
The portfolio is run along similar lines to the managers’ highly-rated Baillie Gifford Global Discovery fund – which sits firmly in the top-decile of the IA Global sector since its launch in May 2011 – and Heathcoat-Amory says their strategy is even more suited to a closed-ended structure.
Edinburgh Worldwide has comfortably outperformed its peers in the IT Global sector and various global small-cap indices over the longer term, but was taken over by Brodie and MacDougall in January last year.
According to FE Analytics, the trust has struggled for much of that time due to the tech sell-off last year, but is still outperforming over the period in full with returns of 16.57 per cent. It has an active share of 99 per cent and holds 40 per cent in the US, 26 per cent in the UK, 15 per cent in Europe and 13 per cent in Asia.
Edinburgh Worldwide is currently on a 4 per cent discount, has gearing of 10 per cent and ongoing charges of 0.92 per cent.
Next up is FE Alpha Manager James Henderson’s Henderson Opportunities Trust, which is a genuine all-cap portfolio of UK equities.
Though it has been highly volatile since its launch in January 2007, as its NAV has grown it has come onto the radar of more investors which has led to a tightening discount.
This, coupled with decent underlying performance as a result of Henderson’s stock-picking abilities, means the trust has been the best performing portfolio in the IT UK All Companies sector and has comfortably beaten the FTSE All Share over three and five years.
Performance of trust versus sector and index over 5yrs
Source: FE Analytics
Heathcoat Amory says that though the trust can have big drawdowns over the short term, he expects that long-term outperformance to continue thanks to Henderson’s capabilities.
“We aimed to find trusts and managers who offer a low-cost exposure to active stock picking which we expected to perform strongly over the long run,” he said.
“James Henderson has in our view all of the hallmarks of a manager who suits this ultra-long run time horizon. He has deep experience, and in our view a high degree of modest self-confidence that will enable him to ‘stick his corner’ and avoid capitulating if things go against him.”
Henderson Opportunities, which is trading on a 6 per cent discount to NAV, is highly geared at 19 per cent and has ongoing charges of 1.24 per cent.
To bring a layer of defence to the portfolio, Heathcoat Amory has added the highly diversified RIT Capital Partners trust to the list.
While the performance of the trust, which is chaired by Lord Rothschild and invests across listed companies, private equity, currencies, absolute return strategies and third party managers, has been relatively lacklustre over the medium term, it has been one of the IT Global sector’s best performers over the long term.
According to FE Analytics, it has returned more than twice the gains of its average peer and close to five times the gains of its MSCI AC World benchmark over 15 years – and has done so with a much lower maximum drawdown.
Performance of trust versus sector and index over 15yrs
Source: FE Analytics
Heathcoat Amory says that performance profile is testament to the management team’s highly-rated approach.
“We believe that RIT Capital offers a highly differentiated proposition, and is entirely unique. Benefitting from scale, it has a highly resourced team behind it and offers a highly idiosyncratic exposure to the global investment stage,” he said.
“The macro-asset allocation approach means that it has a light and nimble feel of a trust much smaller than its size, but in our view benefits from the size, reputation and long-term capital in terms of getting access to opportunities presented by third parties (funds, private investments etc.)”
The trust is geared at 9 per cent and is currently trading on a slight 1.2 per cent discount to NAV, having traded on a 3 per cent premium at points over the past 12 months. Its ongoing charges, excluding a performance fee, are 1.22 per cent.
Scottish Oriental Smaller Companies
Heathcoat Amory says it is imperative for long-term growth investors to have exposure to the Asian economy.
“Asia, in our view, is a vital ingredient for a long-term growth portfolio. The demographics alone mean that growth from the region, regardless of the short-term squabbles which erupt along the way, must outstrip that of the developed world over the long term.”
“We think Asian smaller companies, particularly when linked to the ever-growing consumer, are the best way to harness that astonishing potential.”
As a result he and his team have included First State’s Scottish Oriental Smaller Companies Investment Trust, which has been the best performing portfolio in the IT Asia Pacific ex Japan sector over 10 years with returns of 395.13 per cent.
The trust has historically been headed-up by star manager Angus Tulloch, but it has been given a sell rating by certain brokers such as Winterflood following the news that he and his Edinburgh-based team will soon end their association with the company as First State will spilt into two autonomous investment teams.
Nevertheless, Heathcoat Amory says the trust is likely to continue under the stewardship of Wee Li Hee.
“Whilst on paper the leadership of this trust appears to have been trapped in a revolving door, in practical terms there has only been one lead manager on the fund since the departure of Susie Rippinghall – Wee Li Hee.”
“She is supported by two of the new management company’s most senior figures. With its outstanding track record, it is a flagship for the new semi-independent venture. With this in mind, they have everything to play for.”
The trust currently trades on a 2.16 per cent discount to NAV, isn’t geared and has ongoing charges of 1.02 per cent. It does, however, charge a performance fee.
The final trust on the list is Andrew Bell’s Witan Investment Trust which, like RIT Capital Partners, has been added to give the portfolio more balance.
The portfolio is collection of direct equities such as London Stock Exchange Group, Diageo and BT Group along with mutual funds like Princess Private Equity and Blackrock World Mining Investment Trust.
Since Bell took charge in April 2010, Witan has comfortably outperformed its peers in the IT Global sector with returns of 88.31 per cent. As a point of comparison, the FTSE All World index has gained 54.67 per cent over that time.
Performance of trust versus sector and index since April 2010
Source: FE Analytics
Heathcoat Amory says it plays an important role within the portfolio.
“The model, difficult to replicate elsewhere, uses the trust’s scale to negotiate good terms with what the team at Witan believe are exceptional managers for its assets.”
“As a result, shareholders benefit from a structurally geared, low-cost exposure to a diversified range of managers investing around the world. For the long-term investor, the level of oversight and the means to adapt to changing environments through third party managers, provides huge reassurance.”
Witan’s discount has narrowed substantially over recent years and its shares are now trading on a slight premium. However, Heathcoat Amory says this shouldn’t faze long-term investors.
He added: “In an uncertain world, we are optimistic on the trust’s long-term ability to deliver, and so it fits well into our long-run growth portfolio.”
The trust has is geared a 5 per cent and has ongoing charges, excluding a performance fee, of 0.8 per cent.
