Investors who want to make the most of any market rebound should opt for trusts over open-ended funds if they want to maximise their gains, if the recovery from the financial crisis is anything to go by.
A comparison of the open- and closed-ended universes from the point the market bottomed out on 6 March 2009 shows IT sectors (ex VCTs) accounted for 16 of the 20 best-performers over the next five years and nine of the top-10. The positions achieved by the highest IA sectors were sixth, 13th, 15th and 20th.
Over the three years from the bottom of the market, the outperformance was even starker. While again, IT sectors accounted for 17 of the 20 best performers, they also accounted for every one of the 15 best performers.
Of course, these comparisons are not perfect. The best-performing sector over three and five years from the bottom of the market, with gains of 819.22 and 1,067.27 per cent respectively, was IT Global Smaller Companies, yet there is no like-for-like equivalent in the open-ended universe. In addition, its outsized gains may be slightly misleading as there are only five trusts in the sector and only four of these were around in the financial crisis.
Looking at the five best-performing open-ended sectors over both of these periods and then comparing them against their closed-ended equivalents, the outperformance of the latter is still convincing, although not quite as clear-cut. The IT sectors took three of the five top spots over three years and four of the five over five years.
Performance of IA and IT sectors 3yrs from 06/03/2009
Source: FE Analytics
The only open-ended sector that beat its closed-ended equivalent over three and five years from the post-financial crisis market trough was IA North American Smaller Companies; however it is worth noting that its IT counterpart contains just two trusts, JPMorgan US Smaller Companies and Jupiter US Smaller Companies.
Performance of IA and IT sectors 5yrs from 06/03/2009
Source: FE Analytics
Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC), said that one of the main reasons investment trusts rallied so strongly from the financial crisis was that they were among the hardest hit in the crash.
“Because investment companies are listed, their share prices were adversely affected by the weak demand during the sell-off in the financial crisis,” she explained.
“This caused investment company discounts to widen, reflecting the poor investor sentiment. For example, at the end of 2008 the average investment company discount stood at 18 per cent below its net asset value (NAV).
“However, when confidence returned, discounts narrowed and a year later the average discount was 11 per cent. This provided an enhancement to investment company performance.”
In addition, Brodie-Smith noted that the liquid nature of investment trusts meant they did not become forced sellers of distressed assets like their open-ended peers, allowing them to take more of a long-term view.
“Finally, investment companies can gear, namely borrow money to make further investments,” said the communications director. “This added a boost to performance when markets recovered following the financial crisis.”
It was a similar story in the recovery from the dotcom bubble. In the three years after the market bottomed out on 11 March 2003, 18 of the 20 best performing sectors were closed-ended. The only open-ended sectors that made this list were IA European Smaller Companies, in 14th place with gains of 186.6 per cent, and IA Global Emerging Markets, in 16th place with gains of 175.69 per cent. The top-performing sector overall was IT Infrastructure Securities with gains of 526.71 per cent.
Looking at the five best-performing open-ended sectors during this period and then comparing them against their closed-ended equivalents, the outperformance is even more convincing than in the rebound from the financial crisis.
Four of the five closed-ended sectors outperformed their open-ended equivalents; in the other case there was no closed-ended equivalent to IA Global Emerging Markets, with the IT sector of the same name not introduced until 2007.
Performance of IA and IT sectors 3yrs from 11/03/2003
Source: FE Analytics
The best-performing open-ended sector during this period was IA European Smaller Companies, with gains of 186.6 per cent. Its closed-ended equivalent made 290.38 per cent.
Brodie-Smith added: “Whilst market volatility is undoubtedly unsettling, it’s reassuring to know that investment companies have weathered two world wars, the Great Depression, the bursting of the dotcom bubble and the global financial crisis.
“They are still delivering strong long-term performance and continuing to adapt to meet investors’ financial needs today.”
However Adrian Lowcock, head of personal investing at Willis Owen, said many quality trusts only moved from premiums to discounts for a brief amount of time in the March crash, so they are unlikely to rebound as strongly as they did following the financial crisis. He also warned that piling into risk assets now is not a one-way street.
“The risk is the assumption that we have now reached the lowest point – there could be another leg down from here as the focus moves away from the length of the lockdown and towards the economic impact,” he finished.