Cheap investment trusts for your portfolio

FE Trustnet takes a closer look at some sector-leading portfolios in the AIC universe that are inexpensive, even by the standards of the closed-ended space.

By Joshua Ausden, News Editor, FE Trustnet
Wednesday May 09, 2012

With RDR fast approaching, there is set to be more of an emphasis on cheaper products among advisers.

The corrosive impact of costs in the long-term has been well documented; a recent FE Trustnet study for example, revealed that over three, five and 10-year periods the funds with a bottom-quartile total expense ratio (TER) across a number of IMA sectors vastly outperform those that are in the top quartile. ALT_TAG

On average, closed-ended funds are less costly than their open-ended rivals, but even among investment trusts there is a large difference. Some of the specialist portfolios in the AIC universe have a TER in excess of 2.5 per cent, which is above average even for a traditional fund. However, there are a number of actively managed products that charge less than 1 per cent.

Here is a selection you may like to consider for your portfolio:

Temple Bar Investment Trust – TER 0.5 per cent

Headed up by the highly rated Alastair Mundy and with one of the most consistent records in the IT UK Growth & Income sector, the £532m Temple Bar Investment Trust is a favourite among UK equity investors.

A TER of just 0.5 per cent is also a big draw – particularly compared with its rivals in the open-ended universe. According to FE data, the average fund in the IMA UK Equity Income sector has a TER of 1.57 per cent.

These low charges have contributed to the portfolio's stellar record in the long-term; since Mundy took over as manager in October 2002, it has returned 192.9 per cent, beating its FTSE All Share benchmark by 73.69 per cent, albeit with slightly more volatility. It has outperformed the index in seven of the 10 calendar years since the manager took over.

Performance of trust vs sector and index

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Source: FE Analytics

With returns of 27.26 per cent, it has also vastly outperformed its sector average and benchmark over five years, which have delivered -14.66 and 1.36 per cent respectively. Only one open-ended fund, Unicorn UK Income, has returned more than the trust over this period.

It is a top quartile performer over one and three years as well.

Temple Bar boasts one of the best income records in the investment trust universe, growing its dividend 28 years in a row according to the latest AIC research. It currently has a one-year historic yield of 3.95 per cent.

With such a strong record and a general demand for income products at present, it is of little surprise, therefore, that it is on a premium of 1.6 per cent.

Mundy is a contrarian investor, attempting to identify out-of-favour companies that he believes are undervalued. Although the trust has a large cap focus, he has some smaller names in his top-10, such as Signet Jewellers.

Aberdeen New Dawn Investment Trust – TER 1 per cent

Emerging market funds in the IMA and AIC universes traditionally have an above-average TER, since research costs tend to be greater in this area of investment. However, within the IT Asia Pacific ex Japan sector, there is a sector-leading portfolio with a TER of just 1 per cent.

Headed up by industry stalwart Hugh Young and his Asian equity team, the trust is the third-best performer in its IT Asia Pacific ex Japan sector over the last decade, with returns of 309 per cent.

Both of the trusts that have returned more have a small cap focus, and are as a result far more volatile.

With returns of 75.78 and 65.47 per cent, the trust has also outperformed its sector average and peer group over three and five years respectively.

Like all of Young’s portfolios, Aberdeen New Dawn places an emphasis on quality companies with strong balance sheets. As a result, it typically outperforms during down markets – including 2008 – although it sometimes lags the market during up periods.

Unlike many of its competitors, like the cheaper Schroder Oriental Income trust, Young’s trust doesn’t charge a performance fee.

In spite of its strong record, the portfolio is currently on a discount of 10.2 per cent, largely due to the poor performance of the Asia region in general last year.

Scottish Mortgage Investment Trust – TER 0.51 per cent

James Anderson’s £1.7bn portfolio is one of the largest and most established investment trusts on the market.

The manager, who was recently identified by Winterflood’s Simon Elliot as one of the strongest in the closed-ended industry, has a long-term bias and has no problem with underperforming the market in the short- or even medium-term.

This style has boded well for the trust under Anderson; according to FE data, it has returned 128.25 per cent in the last decade – more than twice as much as its FTSE All World benchmark.

Over 20 years, the portfolio has delivered 252 per cent, though it should be noted that Anderson only took over from Max Ward in April 2000.

The trust is currently trading on a 10.6 per cent discount, which is above average for its IT Global Growth sector.

In a recent interview with FE Trustnet, Anderson said he was generally optimistic about the long-term outlook for equity markets, in spite of tensions in the eurozone.

He points to Chinese consumer growth and the technological advancement in healthcare as reasons to be particularly upbeat.

BlackRock Smaller Companies IT – 0.73 per cent

Mike Prentis’ BlackRock Smaller Companies investment trust is arguably the highest profile UK small cap portfolio in the AIC universe. The trust, which was launched in 1906, has a TER of just 0.73 per cent, which is 0.3 per cent less than the average UK Smaller Companies trust, and 1 per cent less than the average UK Smaller Companies fund.

It is the best-performing vehicle in its IT UK Smaller Companies sector over the last decade, with returns exceeding 256 per cent. It has also vastly outperformed its sector and benchmark over three and five years, and lost less in the last 12 months.

Performance of trust vs sector and benchmark

Name	1-yr returns (%)	3-yr returns (%)	5-yr returns (%)	10-yr returns (%)
BlackRock Smaller Companies IT	-0.38	125.63	36.25	256.7
IT UK Smaller Companies	-4.74	69.24	7.67	121.75
RBS HGSC + AIM ex Investment Companies	-6.79	57.27	-8.87	93.31

Source: FE Analytics

The portfolio is, however, significantly more volatile than its peer group and benchmark.

Only the Henderson Smaller Companies trust is cheaper, but Blackrock has a far superior record. Thanks to last year’s sell-off in small caps, Prentis’ portfolio is currently on a discount of 13.3 per cent.

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jonuk76 May 10th, 2012 at 03:21 PM

I do use investment trusts but although the headline TER's can be a lot lower than active managed, retail UT's or OEIC's, there are other costs which can't be ignored.

For example, one of the trusts I recently considered was the Lindsell Train IT. It seemed to meet the criteria I was looking for, but I didn't invest in it because the shares in the trust are very illiquid. At the time of writing, I am seeing a spread (difference between bid and offer price) of 11.5% quoted on the stock exchange. This is unacceptable, as that is a considerable loss right from the outset.

There are also broker fees. I don't know of any broker who offers "free" trading on IT's although there are some who offer low cost options if you are not too fussy about the timing of deals. Another cost is Stamp Duty which is added at 0.5% to buys of UK domiciled trusts.

Theo May 09th, 2012 at 04:52 PM

I often see statements that IT are cheaper than UT and it is probably correct, but writers seem to quote each other without presenting any good evidence. where are the means, standard deviations and sample sizes? The fact you state, that some IT have TER below 1%, is not useful because so have some UT. In fact I doubt if TER can be used for comparison, because of the ubiquitous performance charges in IT. I cannot even understand understand why people expect extra payment for doing the job they are paid to do. Very unprofessional.

Ark Welder May 09th, 2012 at 08:46 PM

Not all investment trusts have a performance fee, and it is very easy to find out which ones do an which ones don't. And a low TER does not imply that there is a performance fee. The information is there for those that have a genuine interest in investing.