The commonly held view is that closed-ended funds tend to be riskier than their open-ended rivals – and there is some element of truth to that assumption.
Certainly, while features such as discount volatility and gearing can help investment trusts to outperform in rising markets, they can also put downward pressure on their share prices during times of market stress.
However, as always, there are exceptions to the rule and following on from a similar FE Trustnet study looking at the unit trusts and OEICs which have performed and preserved wealth the best over the longer term, here we look at the trusts that have not only topped their sectors but have done so with the lowest maximum drawdown – which shows the most an investor would have lost if they bought and sold at the worst possible times.
For the open-ended fund study, we looked at the core multi-asset funds which had achieved the feat.
The key difference this time around, though, is that while popular core multi-asset trusts such as Capital Gearing, Personal Assets and The Ruffer Investment Company have all had very low drawdowns, they are now underperforming relative to their sectors on a 10-year view largely due to their cautious positioning since the global financial crisis.
There are, however, equity-biased trusts that have outperformed and protected on the downside over the past 10 years.
We start in the IT Global Equity Income sector, where two trusts have been top quartile for both returns and maximum drawdown – Murray International and the London & St Lawrence Investment Company.
Performance of trusts versus sector over 10yrs
Source: FE Analytics
Bruce Stout’s Murray International trust, for example, has had the sector’s best returns over 10 years with gains of 143.37 per cent but the most an investor could have lost over that time is 31.16 per cent – ranking it second in the sector for that metric.
It has proven to be a highly popular vehicle with investors over the years thanks to its performance and Stout’s expertise, meaning the trust’s shares have regularly traded on a wide premium to NAV.
Regular FE Trustnet readers will have no doubt noticed, though, that Murray International has had a very tough time of it over recent times as it now sits in the bottom decile over one, three and five years.
There have been a number of reasons for that underperformance as not only has the portfolio been biased towards the struggling emerging markets (both equity and bond markets) but the manager has been one of the most vocal critics of the huge amounts of central bank intervention over the past six years or so.
This has led him to a very conservative portfolio and meant he has missed out on certain strongly rising markets.
As the trust has failed to keep up with global equity markets, investors have sold their shares leading to a widening discount which has also hurt returns. Data from the AIC shows, for example, that though Murray International has been a 9 per cent premium at times over the past 12 months it is currently trading on a slight discount to NAV.
Murray International’s discount/premium over 5yrs
Source: FE Analytics
Stout recently told FE Trustnet that he was still cautious on markets but has been putting money to work in certain bombed-out areas.
“The largest quarterly decline in global equity markets for over four years in the quarter just ended has left many investors somewhat shocked and stunned at the ferocity of stock movements,” Stout (pictured) said. 
“They shouldn’t be. Precarious fundamentals have prevailed for some considerable time now and investor complacency has undoubtedly escalated in line with asset prices.”
“Whilst numerous equity markets arguably remain very stretched relative to historic valuations, some sectors such as energy and commodities are becoming increasingly attractive as widespread revulsion towards them intensifies.”
The London & St Lawrence Investment Company has been a more consistent outperformer than Murray International.
FE data shows not only is it second percentile in the IT Global Equity Income sector over 10 years, it is outperforming over three years and tops the table over five years. The trust has also had a lower maximum drawdown over 10 years (27.04 per cent) and has had the best risk-adjusted returns over that time, as measured by its Sharpe ratio.
The London & St Lawrence Investment Company – which has beaten the sector average in six out of the last 10 calendar years – invests in other funds, both closed and open-ended. Its top 10 holdings includes Aberforth Geared Income, Edinburgh Investment Trust, Law Debenture and the Merchants Trust.
Despite its long-term outperformance (and its yield of more than 4 per cent), the investment trust is currently trading on a 4.85 per cent discount – which is wider than its one and three-year averages.
There is only one trust in the competitive IT Global sector to have made the list and it has completely dominated its peer group over the past decade.
FE Alpha Manager Nick Train’s Lindsell Train IT has more than doubled the gains of the sector over 10 years with returns of 398.45 per cent and has had the lowest maximum drawdown over that time at just 29.92 per cent.
As a point of comparison, the MSCI AC World index has made 103.65 per cent over 10 years and had a maximum drawdown of 38.87 per cent.
Performance of trust versus sector and index over 10yrs
Source: FE Analytics
The five crown-rated offering is also among the sector’s top two performers over one, three and five years largely due to the fact it has beaten the sector average in eight out of the last 10 calendar years. Lindsell Train IT is also comfortably outperforming the peer group in 2015 with gains of 37.06 per cent.
It must be noted, though, that the trust differs substantially from most of the sector.
Firstly, it is very small and its investors tend to be very sticky which means Lindsell Train IT consistently trades on a wide premium (the trust is currently on a 24.71 per cent premium to NAV).
While many of its holdings are similar to Train’s Finsbury Growth & Income trust and CF Lindsell Train UK Equity fund, Lindsell Train Ltd (which isn’t listed) is its largest position and accounts for 31.6 per cent of the trust’s NAV.
The only UK trust to make it onto the list is Perpetual Income & Growth, which is headed up by the long-serving FE Alpha Manager Mark Barnett.
Barnett has run the £985m fund since August 1995 and over 10 years it has been the IT UK Equity Income sector’s third best performer with gains of 196.87 per cent (meaning it has more than doubled the FTSE All Share) but has had the peer group’s lowest maximum drawdown at 32.41 per cent.
Performance of trust versus sector and index over 10yrs
Source: FE Analytics
Perpetual Growth & Income is also top decile for its risk-adjusted returns over the last decade and it’s up against both the sector and index over one, three and five years.
The trust, which has a high weighing to healthcare and tobacco stocks, has a decent dividend track record as well having never had to cut its pay-out since Barnett has been at the helm. It currently yields 3 per cent.
Given that performance profile, though, it isn’t surprising to see Perpetual Income & Growth trading on a slight premium to NAV.
While the trust does have exposure to mid-caps, Barnett has run a relatively defensive portfolio for some time and, given the uncertain macroeconomic environment, he says that is unlikely to change for some time.
“We continue to believe that well managed companies which seek to deliver sustainable dividend growth provide the best long-term investment opportunities,” Barnett said.
