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How to choose between similar pairs of products

It may seem strange but there are a number of open-ended funds that have very similar investment trusts, run by the same manager and which follow an almost identical mandate.

A research report published in late 2016 by Canaccord Genuity identified 51 of these product pairings. The list includes many well-known funds such as: Fidelity Special Situations (GB0003875100), Jupiter European (GB0006664683), BlackRock World Mining (LU0075056555), and JPMorgan Emerging Markets (GB0030881550).

‘The pairings are a product of history, where it become fashionable to offer a similar fund in different structures, but is not something that is seen regularly today,’ explains Ryan Hughes, head of fund selection at AJ Bell.

Which type of fund performs the best?

Alan Brierley, director of the investment companies team at Canaccord Genuity, says he expects the inherent competitive advantages of the closed-ended structure to continue to underpin superior long-term returns.

‘Just 45% of investment companies in our report now have a lower ongoing charge, yet 84% of them − 32 out of 38 with a relevant five-year record − have outperformed comparable open-ended funds over five years.’

Four of the investment trusts generated annualised outperformance based on shareholder total returns of 4% or more over the five years to the end of September. They are: Baillie Gifford Japan (BGFD) versus Baillie Gifford Japanese (GB0006014921); Impax Environmental Markets (IEM) versus their identically named open-ended fund (Impax Environmental Markets (IE00B04R3307); Baillie Gifford Shin Nippon (BGS) versus Baillie Gifford Japanese Smaller Companies (GB0006014921); and Monks (MNKS) versus Baillie Gifford Global Alpha Growth (GB00B61DJ021).

Only one open-ended fund in the study did the opposite with Threadneedle UK (GB0001529782) outperforming Threadneedle UK Select Trust (UKT) by an annualised return
of 4.4%.

Matthew Read, a senior analyst at QuotedData, says he tends to find that, when investing personally, fund managers invest more in their closed-ended vehicles.

‘They will usually say that, whilst they like both structures, closed-ended funds do not face the same liquidity constraints as open-ended funds. This means it is easier for them to take a longer term view and perhaps invest in less liquid opportunities, which offer superior returns, but whose liquidity is not appropriate for an open-ended vehicle. This additional flexibility is perhaps why we often see the closed-ended fund trump its open-ended equivalent over the long-term.’


Inv Trust


Edinburgh Investment Trust (EDIN)


Invesco Perpetual High Income (GB0033054015)

Invesco Perpetual High Income aims to achieve a high level of income, together with capital growth, by investing mainly in UK companies with the balance invested internationally. It has a very similar portfolio to the £1.75bn Edinburgh Investment Trust that seeks to increase net asset value by more than the FTSE All-Share and grow its dividend ahead of UK inflation.

Both funds have been managed by Mark Barnett since the departure of Neil Woodford in 2014, but there are some key differences afforded by the use of the two alternative structures. These include the fact that the investment trust has gearing (borrowing to invest the proceeds) of 15%, and ongoing charges that are 0.3% less than the open-ended fund.

The historic yields are both around 3.3%, but the open-ended fund has two distributions a year, whereas EDIN pays every quarter. As with all other investment trusts it also has the flexibility to use its revenue reserves to smooth the annual dividends so as to maintain a steadily rising level of income.

‘Edinburgh Investment Trust has been a constituent of our model portfolio since 2008. Over five years, it has outperformed the £11.6bn Invesco Perpetual High Income unit trust and FTSE All-Share by an annualised 2% and 3.5% respectively,’ explains Brierley at Canaccord.


Fidelity Special Values (FSV)


 Fidelity Special Situations (GB0003875100)

Both of these UK funds are run by Alex Wright, who is a contrarian value manager. Their portfolios are almost identical with the main difference being the ability of the investment trust to employ gearing to generate extra returns. This has produced strong outperformance during periods of rising markets, although the impact is negative when markets fall as it has the effect of amplifying the losses.

‘I currently favour the open-ended fund, Fidelity Special Situations. The discount of the investment trust is very narrow, while the market is trading high despite the spectre of Brexit looming large. With this in mind, I’d prefer to avoid the gearing and potential additional volatility that this could bring should markets have a wobble,’ explains Hughes.

The £605m Fidelity Special Values investment trust is trading on a tighter than normal discount of 5.9% and has ongoing charges of 1.1%, which is higher than the 0.94% charged by the £2.96bn Fidelity Special Situations. Its net gearing is currently 8%.


Jupiter European Opportunities (JEO)


The Jupiter European fund (GB0006664683)

Alexander Darwall has managed the £652m Jupiter European Opportunities investment trust (JEO) since November 2000 and the £3.8bn Jupiter European fund since January 2001. They each have a concentrated portfolio of just 36 stocks and have outperformed their peer groups over the longer term.

It is interesting to note that the investment trust is the more expensive of the two – possibly on account of the fact that it is much smaller – with ongoing charges of 1.08% versus 0.99% for the open-ended fund. It also has a performance fee of 15% of relative performance subject to a high watermark and a cap of 4.99%.

‘2016 was more challenging and this, accompanied by European headwinds, has seen the (investment trust shares) suffer a de-rating. While acknowledging the performance fee, we think this is a good opportunity to buy one of the best stock-pickers on a discount of 5.9%,’ says Brierley. (NS)

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