Tom Tuite-Dalton, investment trust analyst at Oriel Securities, says that investment trusts represent better value than open-ended funds during bull runs and that this is best evidenced by the performance of mirror funds, where the same manager runs similar strategies in the investment trust and open-ended universes.
"Aberforth Smaller Companies and Jupiter European Opportunities are just two examples where the investment trust has offered better performance than the open-ended counterpart," he said. "Both make use of leverage which is an advantage in a bull market."
"Leverage in the Jupiter European Opportunities Trust is at 24 per cent right now, which is high compared to others. Manager Alexander Darwall has a great record over a long period so this is a good bet for investors."
Examples where investment trusts have outperformed their mirror funds are numerous and easy to find.
According to data from FE Analytics, star manager Neil Woodford’s Edinburgh Investment Trust returned 54.69 per cent in the market rally from 6 March 2009 to 1 January 2011 while his similarly run Invesco Perpetual Income fund returned 43.66 per cent.
Meanwhile, FE Alpha Manager John McClure’s Unicorn UK Income fund has underperformed the Acorn Income investment trust by 45.82 per cent over the period.
Performance of trusts vs funds during market rally
| Name |
Returns 6 March 2009 - 1 Jan 2011 (%) |
| Edinburgh Investment Trust |
54.69 |
| Invesco Perpetual Income |
43.66 |
| Jupiter European Opportunities Trust |
167.5 |
| Jupiter European |
92.15 |
| Acorn Income |
173.77 |
| Unicorn UK Income |
127.95 |
| Standard Life UK Smaller Companies Trust |
150.59 |
| Stan Life Inv - UK Smaller Companies |
115.96 |
Source: FE Analytics
Peter Walls, manager of the Unicorn Mastertrust fund of investment trusts, says that the tide is starting to turn in favour of closed-ended products.
"There is a good case for seeing a recovery on a 12-month view and, with that, plenty of scope to see discounts narrowing. Discounts have widened in the last seven months of 2011 and I’d be surprised if we didn’t see a reversal of that trend."
"Now we are at the stage where we can comfortably say that investment trusts look very attractive."
Walls says investors should focus on areas such as listed private equity – a sector to which open-ended funds are not exposed – that have underperformed in the last year.
"Electra Private Equity Trust and 3i are good examples where discounts have widened dramatically," he added.
"Discounts on small cap funds have also widened a lot compared to the rest of the market. There are a handful of funds, including Montanaro Smaller Companies, which should see growth in NAV as well."
A recent FE study outlined some private equity trusts that look good value at the moment.
Investment trusts also boast other significant advantages over open-ended funds, according to David Coombs, head of multi asset investment at Rathbones.
"One of the big pros is that closed-ended funds have a fixed amount of capital and are not buffeted by inflows and outflows," he explained. "These market movements can have a negative effect, particularly in illiquid markets."
"Investment trusts also don’t have the admin costs of introducing and cancelling units. One problem is that at the moment there is not as much choice in the closed-ended universe but where they are available I would take an investment trust over its mirror fund every time."