In the second half of last year investment trusts underperformed, wiping out a strong first half, with the FTSE Equity Investment Instruments index down 9.2% for the year.
This compared to a fall of 3.5% from the FTSE All Share Index, which benefited from a partial recovery in the final quarter that was substantially higher than the trust sector.
According to Winterflood Investment Trusts’ annual review, in the final quarter of 2011 the trust sector was up just 1.8% compared to a rebound from the FTSE All Share of 8.4%.
"Despite volatile market conditions, the sector average discount remained relatively stable in 2011, ending the year at 8%, slightly wider than 7.8% 12 months previously", the Winterflood report said, "However, discounts did widen towards the end of the year reflecting increasing apathy among investors over the prospects for equities."
Once market conditions improve, however, Winterflood said it sees scope for the sector to outperform due to both discount tightening and its overseas bias.
Room to outperform?
This is a view David Coombs, head of multi-asset investments at Rathbone Unit Trust Management, agrees with.
"Investment trusts are an attractive proposition and have the potential to outperform their unit trust counterparts in 2012, while the advent of RDR should also be very supportive."
But he added: "The industry needs to focus on investors and restructure in order to ensure more alignment of interests."
Positive elements of the close-ended fund sector are lower fees (due to lower distribution costs) and their immunity from distractions, or growing pains caused by large liquidity flows, he continued.
They are also perfectly designed for less liquid strategies, such as small caps, emerging markets and corporate credit, according to Coombs.
For these attributes to come to the fore the industry’s cosy club image requires an overhaul, he concluded.
Last week Morningstar launched an analyst ratings service of close-ended funds, in a move that will hopefully see more investment companies look to increase their transparency.
Previously investment trusts have not been subject to the same reporting standards as Oeics, a matter Morningstar hopes to address as more companies make their portfolio holdings available to their rating service.
So far the service only has 32 out of a possible universe of 295 funds, but it hopes to be up towards 100 by the end of the year.
