Same manager, same process, but should you buy the fund or trust?

Picking whether to invest in an investment trust or fund can be a difficult decision, particularly when they are both managed by the same person or team, with the same process, and little to choose between returns.

With the end of the tax year approaching, however, it may be a good time to consider making a switch, as investors caught out by the growth stock sell-off in January can reduce their liabilities by switching to almost identical alternatives.

John Moore, senior investment manager at wealth manager Brewin Dolphin, explained that a £25,000 investment into Baillie Gifford American might now be worth £20,000.

“However, going into the new tax year you could sell this, crystallise the £5,000 loss, and buy the investment trust version of the fund at a reasonable discount to net asset value (NAV),” he said.

“Not only does this give you the same exposure you had before at a lower price point, but you can carry the loss forward for up to six years to offset profits made elsewhere in your portfolio.”

However, not all ‘mirror’ portfolios are equal. Some investment trusts may have higher gearing – something that open-ended funds do not have – while others might take on more risk with unquoted companies – an area that funds usually steer clear from.

Whether investors make changes to their portfolios now to capitalise on the end of the tax year, or for other reasons, it can be difficult to work out whether to buy the open- or closed-ended versions of the same portfolio. Below, Trustnet asked fund pickers which option was better across four well-known funds and trusts.

The Fidelity Special Situations fund and Fidelity Special Values trust

Jason Hollands, managing director of corporate affairs at Tilney Investment Management Services, said that although these two portfolios were not identical, both are managed by FE fundinfo Alpha Manager Alex Wright with a multi-cap approach that includes significant exposure to smaller companies.

Over the past five years the trust has come out on top, making 45.7%, while the fund has gained 26.8%, but Hollands said he just about preferred the fund for the longer term.

Total return of fund vs trust over 5yrs

Source: FE Analytics

“The trust does have the advantage of being able to utilise gearing, but this is pretty modest currently at 8%. I’d marginally prefer the fund over the trust currently, as the trust is trading at a modest premium of 1.9%,” he said.

Hollands added that these “value-tilted strategies” should be well positioned for the current market environment, with interest rates likely to rise and inflation running rampant, making both “sound investment choices”.

The Trojan fund and Personal Assets trust

Another pair worth highlighting are the Trojan and Personal Assets portfolios managed by Sebastian Lyon at Troy Asset Management.

Both focus on capital preservation and real returns, investing in a mix of equities, index-linked bonds, gold and cash, as well as short-dated bonds.

Once again, the trust has been the clear winner, beating the fund over one, three five and 10 years, although the gap between the two is minimal – 3 percentage points over a decade.

Total return of fund vs trust over 10yrs

Source: FE Analytics

“Personal Assets is trading at a 1.4% premium, which might deter some, but it has a 0.73% ongoing charge which is lower than the 0.86% annual costs on the X-shares of the Trojan fund,” Hollands said.

“The trust also has a higher yield of 1.1% versus 0.1% on the fund, which might swing it in favour of some investors.”

The Baillie Gifford American fund and Baillie Gifford US Growth trust 

Baillie Gifford funds have been among the worst hit in the recent market sell-off, and the American fund and US Growth Trust are no exception.

Managed by Alpha Managers Tom Slater and Kirsty Gibson as well as Gary Robinson and Dave Bujnowski, the fund offers investors exposure to some of the fastest-growing companies in the US, including the likes of Tesla, Amazon and Moderna. While these have been extremely profitable trades over the past 10 years, it has been a different story over the past six months. The trust, which is managed by Gibson and Robinson, has a similar philosophy.

Both the fund and the trust have fallen by 37% over the past three months and over one year are down 39.3% and 41.1%, respectively. However, the trust has been the winner since it was launched four years ago, up 116.9% versus 104.1% for the fund.

Total return of fund vs trust over 10yrs

Source: FE Analytics

Ben Yearsley, director at Fairview Investing, said this was a “hard call” for investors, as although the portfolios have the same management team, process and costs, the trust has unquoted holdings – an area that is set to increase as a percentage of its assets.

“Whilst this should make the trust less volatile than the fund, it does (in my view) increase the risk further. With Baillie Gifford’s high-risk approach to long-term investing, do you need to add gearing and unquoted investments to try and boost the return? Probably not is my answer, so in this scenario the fund is more appropriate to most investors,” he said.

The Fidelity Emerging Markets trust and Fidelity FAST Emerging Markets fund

Last up is another Fidelity pairing. The firm assumed the management contract of the old Genesis Emerging Markets fund last year, with Alpha Manager Nick Price taking charge.

Price heads up the emerging markets team and is probably better known for the long-only Fidelity Emerging Markets fund, but alongside Chris Tennant he has also run the FAST Emerging Markets fund for more than a decade.

This is a 130/30 long-short fund, giving it the opportunity to make profits from falling share prices as well as rising ones.

“The trust will mirror this fund,” Yearsley said, with both using Price’s growth at a reasonable price (GARP) investment style

“There is one crucial difference though: the charges. The annual management charge on the trust is going to be 0.6% with an expected OCF of 0.85% and no performance fee, whereas the fund has an OCF or 1.3% currently and a performance fee. Buy the trust.”