Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
The UK and global trusts beating the market
The simple option for investors these days is to choose a tracker fund which mirrors a certain part of the market. Therefore, actively managed funds really need to add value and deliver market-beating returns if they are to convince investors not to go for the easy option of a tracker fund.
All products classified as investment trusts are actively managed funds and there are certain areas which have a solid track record of adding value.
Shares has found that all nine investment trusts in the UK All Companies sector have beaten the market (as measured by the FTSE All-Share index) on a five year-basis. The returns vary between approximately 50% and 98% versus around 34% from the FTSE All-Share.
In the global equity category, 13 out of 17 investments trusts have beaten the MSCI World index which is typically used as the benchmark. Of the four laggards, two have changed (or are about to change) managers in recent years which goes to show how investment trusts have the advantage of having a board of directors who can try something new if performance isn’t up to scratch.
In the UK All Companies sector, the top performer on a five-year basis is Artemis Alpha Trust (ATS) which focuses on growth-orientated businesses, many of whom pay growing dividends. A 98% return over that period is nearly three times better than the market.
Interestingly, the investment trust’s five-year performance is better than its 10-year return of 92%. It underwent a strategic review in 2018 after going through a bad patch thanks to large exposure to small energy stocks just as oil prices crashed. A new manager was appointed, and fresh thinking has helped to revive the trust.
On a 10-year basis, the best performer in the UK All Companies sector is Henderson Opportunities Trust (HOT) with a 348% return.
Looking at the global investment trust sector, Baillie Gifford-managed Scottish Mortgage Investment Trust (SMT) is the best five-year and 10-year performer, returning 375% and 1,211% respectively.
At 0.34%, it has one of the lowest ongoing charges of all active funds. However, the trust is prone to higher levels of volatility as witnessed earlier this year. This is in part due to its decision to invest in privately-owned companies as well as ones which trade on a stock market.
The second-best performer in the global equities sector with a 164% return over five years is Monks Investment Trust (MNKS) which is also managed by Baillie Gifford.
It seeks to invest in companies whose growth prospects are under-appreciated by the market and where there is a greater than a 30% probability of doubling shareholder funds over a five-year period.
Recent performance has been boosted by strong returns from electric vehicle maker Tesla, Singapore-based consumer internet company Sea Limited and drugs firm Moderna.
Why are investment trusts appealing?
Unlike unit trusts and open-ended investment companies, investment trusts have a fixed number of shares which can be bought and sold. As their price is determined by the market, investment trust can trade at a premium or discount to the value of their assets.
Investment trusts benefit from their ability to smooth dividends. In marked contrast to open ended funds, investment trusts can keep up to 15% of their dividend income in reserves each year rather than paying it all out immediately.
In difficult times, should any portfolio holdings cut their dividends, the trust can still maintain a consistent dividend payment to its shareholders by dipping into its reserves.
The closed-ended structure of investment trusts also enables the fund manager to adopt a longer-term investment approach, because they do not have to sell assets to pay for investors who wish to exit the fund.