One of the main reasons cited by our readers for their interest in passive vehicles over the past few years is their broadly lower cost than actively managed portfolios.
Forget the reams of studies periodically contradicting each other over which is better, depending on the period under discussion and the markets focused on.
No, investors care a lot about how much they pay fund groups to invest their cash. With the likes of Vanguard and iShares locked in a price war, it has meant you can expect to pay as little as 7 basis points to track the FTSE All Share and, with reasonably strong markets over the past six years, until recently that has not been a bad thing to do.
The Retail Distribution Review has also been huge factor in pushing down costs across the asset management industry and fund buyers are aware that the one of the biggest drag on returns is the ongoing charges figure (OCF).
However, there is still an enormous difference in the cost of investing, with some vehicles vastly more expensive than their sector peers.
Here we take a look across the three main UK equity sectors in the Association of Investment Companies (AIC) universe to see which trusts are significantly cheaper than their peers and have also outperformed over the longer term.
UK Equity Income
The average annual charge in this popular sector is 0.69 per cent and while all trusts that have lower OCFs have all beaten the FTSE All Share index over 10 years, not all are as consistent in outperformance over the shorter term.
However, City of London IT is the cheapest in the sector with an OCF of just 0.44 per cent. It is also the sixth best performer over 10 years out of 22 trusts and has nearly doubled the index over five years.
Manager Job Curtis is also one of the longest serving, having run the portfolio since 1991. His trust has returned more than the FTSE All Share index in nine of the past 10 full calendar years, but he lagged the bull market of 2009 – and is second quartile in 2015 so far in the IT UK Equity Income sector.
The manager recently told FE Trustnet why he has been straying away from his bias towards blue chips and more into the mid-cap space.
The two other standout ITs with low OCFs are both managed by Invesco Perpetual. Edinburgh IT and Perpetual Income and Growth have respective OCFs of 0.61 and 0.65 per cent. However, the latter charges a performance fee that bought total charges up to 1.23 per cent in the most recent data.
Performance of trust, sector and index over 10yrs
Source: FE Analytics
FE Alpha Manager Mark Barnett heads up both trusts, although while he has been the manager since 1999 of Perpetual Income and Growth he only took up Edinburgh when its former long-term manager Neil Woodford left the group in 2014.
Barnett is regarded as one of the best equity income managers in the UK space and the Perpetual Income and Growth trust is top quartile over three years and top decile over five and ten.
Since the manager took over the portfolio it has returned 466.75 per cent while the sector average was 159.64 per cent and FTSE All Share index gained 94.73 per cent.
Performance of trust, sector and index since 1999
Source: FE Analytics
Perpetual Income and Growth is on a 0.5 per cent premium while Edinburgh is on a 2.5 per cent premium.
UK All Companies
There is a noticeably lower dispersion of charges around the mean average in this 12-strong sector and just one portfolio stands out as being significantly cheaper than its rivals but also with a very good track record: the JPM Mercantile investment trust, which has an OCF of 0.5 per cent and does not charge a performance fee.
The £1.9bn JPM Mercantile trust, which invests primarily at the lower end of the cap spectrum, is co-managed by Martin Hudson, Anthony Lynch and Guy Anderson. Hudson has been a listed manager on the portfolio since 1994, Lynch since 2009 and Anderson since 2012.
Over three years it has returned 75.8 per cent compared to an average return in its IT UK All Companies sector of 47.8 per cent. It has outperformed over five years as well and over 10 years it has nearly tripled the FTSE’s gain.
Performance of trusts, sector and index over 10yrs
Source: FE Analytics
Top holdings include DCC, Berkeley and Howden Joinery. The trust is only just on double-digit discount at 10.4 per cent.
UK Smaller Companies
Two trusts stand out in this sector as being low cost and with a strong track record of outperformance: Henderson Smaller Companies and BlackRock Smaller Companies.
They have respective OCFs of 0.47 and 0.71 per cent. However they also have performance fees and after this is factored in, total fees rise to 0.89 per cent and 1 per cent.
Both also have long-term management. Henderson Smaller Companies has been run by Neil Hermon since 2002; BlackRock Smaller Companies has been headed by Mike Prentis since 2002 as well.
They have the third and second best returns in the sector – out of 12 trusts – over 10 years with BlackRock Smaller companies beating Henderson Smaller Companies by 10 percentage points.
Performance of trusts, sector and index over 10yrs
Source: FE Analytics
However, the Henderson trust has been more consistent in outperforming with a top quartile return over one, three, five and 10 years while the BlackRock trust is second quartile over one and five years, third over three years and first over 10 years. It is on a narrower discount 11.9 per cent compared to BlackRock’s 13.9 per cent.