Best risk/return investment trusts of the decade
Closed-ended funds deemed to be high risk have more than made up for their volatility over the last 10 years with headline-grabbing returns.
Aberdeen Asian Smaller Companies
has the best risk-adjusted return of any fund in the AIC Investment Companies universe over a 10-year period, according to FE Trustnet
The £243m trust, which is headed up by Hugh Young and his Asian equities team, has returned a staggering 556.82 per cent in the last 10 years, with a volatility only marginally higher than its sector average and MSCI AC Asia Pacific ex Japan benchmark, which have returned 122.63 and 163.95 per cent respectively.
Aberdeen Asian Smaller Companies has an annualised volatility of 20.9 per cent over 10 years, compared with 20.41 per cent from its benchmark.
Performance of trust vs sector and index over 10-yrs
Source: FE Analytics
The study used the Sharpe ratio to determine which funds had the best risk-adjusted performance over the set periods. The ratio measures a fund's return relative to a notional risk-free investment – in this case, cash. The difference in returns is then divided by the fund's volatility.
Hugh Young’s portfolio also made it into the top-five trusts list by Sharpe ratio over five years, and in spite of a difficult 2011 for the Asia Pacific region, it is a top-20 performer over three years as well.
Emerging market trusts, which are generally deemed as highly volatile, dominate the elite list over 10 years. Of the 10 trusts with the highest Sharpe ratio, seven have an emerging markets focus, three of which are headed up by Aberdeen. Over five years, four trusts make it into the top-10, including the Aberdeen Asian Income fund, which is yet to achieve a 10-year track record.
By contrast, only two emerging market products made it into the top-10 list in a recent FE Trustnet study
that focused on the best risk/return open-ended funds of the decade.
Top risk-rated funds over 10-yrs
Source: FE Analytics
While some investors tend to avoid emerging market portfolios due to their reputation for high risk, particularly if they have a single country or small cap focus, these trusts have more than made up for their volatility with headline-grabbing returns.
"Emerging markets have of course been the place to be in the last 10 years, but it’s interesting that there are more trusts [in the top-10 list]," said James Brown, investment trust analyst at Winterflood Securities.
"There are some very strong options in this area. Aberdeen is a quality group – it has long been associated with its well-defined, quality, value-driven approach. Within Asian and smaller companies, the group’s priority is to protect against the downside better than the market."
"While it is difficult to say whether emerging markets will be able to keep up these returns in the next 10 years, in a volatile area such as this, the Aberdeen approach is very appealing."
The other three funds in the elite list include Capital Gearing and Artemis Alpha
, which both have a UK focus. Peter Spiller’s Capital Gearing Trust is the only genuine low-risk portfolio to make it into the top-10. With a volatility of 10.1 per cent, it is by far the least volatile UK Growth trust over 10 years. It has returned 158.44 per cent over the period, compared with the FTSE All Share’s 58.65 per cent.
Performance of trusts vs index over 10-yrs
Source: FE Analytics
The Artemis Alpha
trust is far more volatile than Spiller’s portfolio, but it has compensated for this with higher returns. The trust can invest in unquoted companies and hold stocks outside of the UK. Managers John Dodd and Adrian Paterson are currently overweight oil and gas, which makes up 37.8 per cent of the portfolio.
It is far more concentrated than the Capital Gearing Trust, which has only 9 per cent invested in its top-10 holdings.
HG Capital is a private equity trust, meaning that it only invests in unquoted companies. Although this type of product tends to be highly volatile, the trust has managed to protect against the downside effectively.
The Ruffer Investment Company
is also worth a mention. It was only launched in July 2004, so it was not included in the study; however, over five years it has a Sharpe ratio of 1.17, which is far and away the best score of any investment trust. It has returned 89.62 per cent over this period, with a volatility of just 9.31 per cent.