Why trusts beat funds for the long-term investor
The flexibility afforded to managers in the closed-ended space allows them to put more weight behind their convictions, giving them an edge over their open-ended rivals.
Turbulent markets make it almost impossible for investors to look past short-term noise, but those who want to make the best long-term decisions may want to look at investment trusts instead of funds.
Following inflows, open-ended managers have no choice but to put their money to work, even if they are happy with the portfolio they already have. Similarly, following mass redemptions, the manager is forced to pull money out of their holdings in order to pay back the exiting investor.
It is not always easy to buy or sell an equal share of the companies already in the portfolio due to issues of liquidity.
Closed-ended funds don’t have this problem, however, which means managers can back their convictions more fully without having to react to the concerns of short-term investors.
research shows that trusts generally outperform funds over long time-frames
, and some analysts suggest this flexibility is one of the reasons why.
"Fund managers always say to us that it is far easier to manage an investment trust because of the issue of flows," said Simon Elliott, analyst at Winterflood Securities.
"Many say in an investment trust you can make longer-term investment decisions."
"If you look at Mark Mobius
, for example, his Templeton Emerging Markets Trust has outperformed its fund equivalent
. In his fund he keeps aside 5 to 10 per cent as a liquidity buffer, but in his trust he is fully invested."
"He does this because he doesn’t want to have to change the shape of his portfolio to cope with redemptions. In the investment trust he doesn’t have this problem."
Data from FE Analytics
shows the Templeton Global Emerging Markets fund has made 115.27 per cent since launch in 2004, while over the same period the Templeton Emerging Markets Trust has made 297.47 per cent.
Performance of fund since launch vs trust
Source: FE Analytics
Last month FE Trustnet
revealed the trusts of a number of FE Alpha Managers, including Neil Woodford
, Harry Nimmo
and Alexander Darwall
, outperformed their equivalent funds.
Comparing the average performance of a number of traditionally higher-risk investment areas confirms this trend.
The North America, UK Smaller Companies, Europe and Global sectors in the AIC universe have outperformed their equivalent IMA sectors, with one exception.
Only the UK Smaller Companies sectors buck the trend, returning almost identical gains of 122.99 per cent for the IMA sector and 122.10 per cent for the AIC sector.
Performance of AIC and IMA sectors over 10-yrs
Source: FE Analytics
|IT North America Equities
|IMA North America
|IT UK Smaller Companies
|IMA UK Smaller Companies
|IMA Europe ex UK
|IT Global Growth
Elliott continued: "Not having to worry about outflows is good for the longer-term managers like Alexander Darwall of Jupiter European Opportunities and Mark Mobius."
"Mark Mobius had a turnover of just one per cent in his trust last year, which shows you he’s really investing for the long-term. An index tracker would have a turnover of five or 10 per cent."