Wins identified a number of equity investment trusts which have comparable open-ended funds, run by the same manager and with the same investment strategy.
The result was a list of some 67 closed and open-ended funds that could be considered comparable over one year, 56 over three years and 46 over five.
Over 12 months to 30 November, 79% (53 out of 67) of investment trusts outperformed their open-ended counterparts in net asset value terms, rising to 88% (59 out of 67) when compared in share price terms.
Over three years the percentage of outperformance fell, with 71% of trusts doing better in NAV, falling to 59% in share price terms. This number increased over five years, jumping to 76% (35 out of 46) of outperforms in NAV terms and 80% in share price terms.
The average NAV outperformance of closed-ended funds was 2% over one year, 1% per year over three years and 1% per year over five years.
According to Wins the greatest outperformance over five years, on both a NAV and share price basis, came from the Baillie Gifford Japan Trust. It outperformed Baillie Gifford Japanese by 67% and 147%, or 11% and 20% per year, in NAV and share price terms respectively.
“Baillie Gifford Japan Trust’s outperformance of the equivalent open-ended fund can be partially attributed to the fact that it has been consistently geared over the five year period, with gearing equivalent to between 10% and 20% of assets,” said Simon Elliott, a research analyst at Wins.
“The manager, Sarah Whitley, has also used the closed-ended structure to increase the small and mid cap bias relative to the open-ended fund, and these companies have delivered strong growth and contributed to the investment trust’s impressive performance record.”
Elliott added the significant outperformance of the trust’s share price demonstrates the “potentially considerable” impact that discount tightening can have on shareholder returns. The fund’s shares moved from trading at a 10% discount at the start of the period, to an 11% premium to NAV five years later.
The Wins research noted that all five investment trusts with the largest five-year NAV outperformance relative to their open-ended equivalents utilised gearing over the period, with the average net gearing figure ranging from 1% in the Invesco Asia Trust, to 14% in Schroder Japan Growth.
“All five with the largest share price performance saw considerable re-ratings over the period, with the discounts all narrowing by at leat 10 percentage points,” said Elliott.
Not all trusts win
Not all trust’s beat their open-ended cousins however. Wins notes the largest underperformance from an investment trust over five years was the Polar Capital Technology Trust, which underperformed the Polar Capital Global Technology Fund by 14% (3% per year), delivering a NAV return of 193% versus 207%.
“This investment trust had a net cash position for the majority of the period, meaning that relative NAV performance did not benefit from gearing,” says Elliott. “However, the open-ended fund also has a net cash and this would therefore not have affected relative performance.”
In terms of sectors, over the last five years only Global Emerging Markets and North America closed-ended funds underperformed their open-ended peers, while all investment company sub-sectors have outperformed over the last 10 years (both in share price and NAV terms).
Despite the outperformance, Elliott said it would be “misleading” to conclude from this analysis that the majority of investment trusts will outperform their open-ended peers over most time periods.
“We are conscious that market conditions have been strong over the last five five years and this tends to suit investment trusts, not least as a result of their ability to use gearing or simply being able to be fully invested,” he said.
“However, if and when there is a market sell‐off, our expectation is that investment trusts will underperform their open‐ended equivalents for the same reasons. In addition, it is a reasonable premise that discounts will widen in volatile market conditions and ultimately it is share prices that drive returns to investors.”
Structural advantages
That said, Elliott said Wins maintains its stance that investment trusts provide fund managers with a structural advantage over the long‐term, as they do not face the same liquidity constraints as open-ended funds.
“Open‐ended funds can face regular or significant outflows, which can require a liquidity buffer, thereby creating cash drag, or may mean managers are forced to sell stocks at inopportune times,” Elliott said. “In contrast, managers of closed‐ended funds do not face these constraints and can therefore take a truly long‐term approach to investment, which should also help to reduce portfolio turnover and the associated trading costs.
“The market conditions may vary but, over time, we would expect this to allow a greater potential for outperformance. At a time when the merits of active investing compared with passive strategies are being debated across the fund management industry, we believe investment trusts that invest in publically-listed equities have an increasingly important role to play.”
