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Investment Trust research – less risky?

Posted by: Brian Dennehy
Membership level: Free
Last time we looked at the long-term performance of investment trusts (see here).  Today we’re looking at the risks, and comparing these to comparable unit trust sectors.
In the previous blog we saw that if you applied Dynamic Fund Ratings to the equivalent unit trust and investment trust sectors, unit trusts were the standout performers.
Today we are looking at what most of our industry (incorrectly) calls “risk”.  What they actually mean is volatility, that is the extent to which a fund goes up and down from day to day.  So when we say risk in this and other blogs, we mean volatility.
To keep the comparison straightforward we consider one simple measure - the worst calendar month over the last 5 and 10-year periods.  In the case of funds (whether unit trusts or investment trusts) risk or volatility is about your journey – in this case the bumps in your journey.
Recap – building the investment trust portfolios
To enable comparison, we’ve applied the same momentum approach that we’ve used in our unit trust research – Dynamic Fund Ratings – to equivalent investment trust sectors.  The UK stock market sectors are our focus, as shown in the tables below, UK All Companies, UK Smaller Companies and UK Equity Income.  (We'll be expanding this to look at popular Asian and Global sectors in future).
We followed the same process as with our original Dynamic research.  Start by selecting the top 3 funds in the sector over the prior 6-months, hold them for 6 months and then repeat the process, and do this every 6 months thereafter.
The resulting three fund portfolio is called the Dynamic UK All Portfolio, or Dynamic UK Smaller Portfolio etc., and each has a unit trust version and an investment trust version.  It is these different versions which are compared in the table below.
To eliminate any seasonal biases, we ran the numbers for the six different 6-monthly periods (Jan/July, Feb/Aug etc.).  This created six unit trust portfolios, and six investment trust portfolios.  In turn this gave us an average worst month number for the unit trust and investment trust versions of the portfolio.  
The results.  And the winner is…
All the Dynamic investment trust (IT) portfolios have worse single months in the last 5 and 10 years than the equivalent unit trust portfolio. (Worst month highlighted in yellow in the table)
Therefore if you had been using only ITs you would have had a bumpier ride.
Now we can draw conclusions also taking into account the previous blog, which looked solely at performance. 
We can say that using a momentum approach to selecting funds (using Dynamic Fund Ratings) results in notably better returns if you buy unit trusts instead of investment trusts when considering the two popular sectors, UK All Companies and UK Smaller Companies, PLUS the unit trust journey is less volatile, or less risky if you prefer that terminology.  
Investment trusts provide a better growth outcome in the case of UK Equity Income, but with greater volatility.
The two blogs to date, including this one, don’t highlight any huge or mis-understood potential in investment trusts, certainly not in these very mainstream sectors.  More to come.
Table 1: The worst months over the last 5 and 10 year periods for the main UK sectors

UK All Companies




Worst month in last 5 years

Worst month in last 10 years

Dynamic Investment Trusts



Dynamic Unit Trusts



Unit Trust sector avg




UK Equity Income





Dynamic Investment Trusts



Dynamic Unit Trusts



Unit Trust sector avg




UK Smaller Cos.






Dynamic Investment Trusts



Dynamic Unit Trusts



Unit Trust sector avg




Topic: Investment research


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