There are some, however, that give investors a one-stop shop to diversification, by investing in other collective instruments.
Funds such as these are generally associated with the open-ended universe, but there are some top-performing closed-ended alternatives that investors may wish to consider for their own portfolio.
Here we look at three "investment trusts of funds" in more detail:
London & St Lawrence IT
The London & St Lawrence IT invests predominantly in investment trusts, although it also has exposure to open-ended funds.
It currently holds the five crown-rated Consistent Practical fund in its top-10, as well as James Anderson’s Scottish Mortgage Investment Trust and the City of London IT.
It tends to invest in equity portfolios, though has 11 per cent in bonds.
The trust is managed by a team, which includes FE Alpha Manager Sean Ashfield. It has a very strong track record over the short-, medium- and long-term, compared with both its peer group and benchmark.
Our data shows that it has beaten the FTSE All Share over one, three, five and 10 years.
It is a top-quartile performer in its IT Global Growth & Income sector over all but 10 years, where it drops in to the second quartile.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
London & St Lawrence’s record is particularly strong over five years. It has returned 62.97 per cent over this period, more than doubling the returns of its benchmark.
In keeping with the diversification benefits of a fund of funds vehicle, the trust has been significantly less volatile than the sector and index, and has protected much more effectively against the downside.
In 2008, the trust lost 19.41 per cent, compared with 29.93 per cent from the All Share, and 28.29 per cent from the average trust in IT Global Growth & Income.
The four crown-rated trust also has an attractive yield, at 4 per cent.
It has an ongoing charges figure (OCF) of just 0.78 per cent, which is very cheap considering that open-ended funds of funds tend to have an OCF in excess of 2 per cent.
The trust is currently trading on a discount of 1.8 per cent, according to the AIC.
Capital Gearing Trust
This is another trust with below-average volatility. It gets its equity exposure from other investment trusts, but holds bonds directly.
Manager Peter Spiller has headed up the £93m trust since 1984, making him one of the longest-serving fund managers in the UK.
He has consistently led the trust to strong risk-adjusted returns relative to its sector. Unfortunately, the trust’s FTSE Investment Companies index benchmark is not recognised by FE Analytics.
Our data shows that it has returned 189.51 per cent over the last decade, beating its IMA Global Growth sector average. By point of reference, the All Share returned 150.46 per cent over this period.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The trust has achieved this outperformance with a fraction of the volatility. According to FE Analytics, it has an annualised score of 10.04 per cent over 10 years, compared with 15.13 per cent from the IT Global Growth sector average.
Capital Gearing has also significantly outperformed its sector over three and five years, with less volatility.
Spiller’s equity portfolio – all via investment trusts – is heavily diversified, with only two holdings boasting a weighting of more than 1 per cent.
Among the manager’s favoured trusts at the moment are the North Atlantic Smaller Companies IT, Advance Developing Markets IT and Hansa Trust.
The five crown-rated trust has an OCF of 1.29 per cent and is currently trading on a very steep premium of 11.9 per cent.
The Cayenne Trust
This is the highest-conviction trust of the three, with close to 50 per cent of its assets invested in 10 investment trusts. This has contributed to its higher volatility as well.
Manager Ian Carstairs’ biggest position is currently in Electra Private Equity. Francis Brooke’s Troy Income & Growth IT is also a top-10 holding.
The manager invests predominantly in equities, but has 10 per cent in fixed interest at present. Again, it uses the FTSE Investment Companies index as its benchmark.
The trust has a strong long-term track record, returning more than 400 per cent over the last decade.
The year of 2003 was particularly strong – our data shows it nearly made 100 per cent in the 12-month period alone, compared with 27.96 per cent from its IT Global Growth sector average.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
However, it has had a tougher time of it of late, which has seen it fall behind its sector over one, three and five years, as well as the FTSE All Share.
The Cayenne IT is by far the most expensive of the three trusts, with an OCF of 1.77 per cent. However it is on the biggest discount, at 3.9 per cent.