Investment trusts are outperforming open-ended funds in most sectors and over most time periods, according to new research carried out for F&C Investments.
Closed-ended funds tend to do better in relative terms in rising markets, although the reverse is also true. However, despite the recent period of extreme market volatility, trusts have outperformed OEICs in seven out of eight major sectors over both one and five years, in six out of eight cases over three years and in all eight sectors over 10 years to 24 September 2011. Past performance is not a guide to the future, however.
The figures, produced by Winterflood Securities for F&C Managed Portfolio Trust manager Peter Hewitt (pictured), looked at share price total returns in the equivalent IMA and AIC sectors for UK Equity Income, UK Smaller Companies, Global Growth, Global Emerging Markets, Asia Pacific (ex Japan), Europe (ex UK), Japan and North America.
The only cases where open-ended did relatively better than closed ended were Japan (over one, three and five years) and UK Smaller Companies (over three years).
The greatest and most consistent degrees of relative outperformance came from Global Emerging Markets (the biggest outperformer over one and three years and the second-biggest over five years), UK Equity Income (first over five years and second over three and 10 years) and Asia Pacific ex Japan (the biggest outperformer over 10 years and the third-biggest over three and five years). These figures refer to relative and not absolute performance. The value of investments can fall as well as rise and relative outperformance may still equate to a negative return.
Hewitt presented the research yesterday at a briefing on the investment trust sector at F&C’s Exchange House offices.
He says: “In many of these sectors, but particularly Global Emerging Markets, Asia Pacific ex Japan and UK Equity Income, trusts will have benefited relative to open-ended funds because of narrowing discounts to net asset value and the use of gearing in rising markets.”
The outperformance figures are based on share price total return, which includes income as well as capital growth. The prominence of UK Equity Income in the outperformance tables may be connected to the fact that closed-ended income funds have also tended to exhibit more consistent dividend payments than their open-ended counterparts, and the attractiveness of the income on offer has led in many cases to the trusts trading at a premium to net asset value.
Interestingly, the income differential between open and closed-ended funds run by the same managers has widened over the past year, a period during which dividends in general have recovered after the struggles of 2009 and 2010.
Investment trusts have an advantage in income terms because they are able to hold back some of their income in reserve during good times, which can then be paid out to maintain income levels when markets are struggling. So in 2010, for instance, the Neil Woodford-managed Edinburgh Investment Trust raised its dividend by 1%, while income on the open-ended Invesco Perpetual High Income fund fell by 2.5%. However, despite a recovery in 2011, the differential has widened, with the open-ended fund’s income payments up 6.8% while the investment trust has raised its dividend by 11.6%.
The picture is even more marked at Standard Life’s open-ended Equity Income fund and its Equity Income Investment Trust, both managed by Karen Robertson. In 2010, while income on the OEIC fell 16.1%, the trust was able to raise its dividend by 2.2%. In 2011 income on the OEIC again fell, by 15.6%, yet the trust raised its dividend by 12.7%. The income from equity investments is not guaranteed.
Hewitt says: “While I would expect dividend growth on open-ended funds to close the gap over the coming months as long as share dividends remain healthy, over the longer term the consistency of dividends from UK Equity Income trusts has definitely been assisted by the use of revenue reserves to maintain dividend payments in difficult times.”
F&C Managed Portfolio Trust is an investment trust that invests in other investment trusts, which themselves invest all over the world. Managed since launch in 2008 by Peter Hewitt, the trust offers a choice of Income and Growth portfolios.