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NEW Investment Trust research - better returns?

Posted by: Sam Lees
Membership level: Free
 
One of the main arguments made in favour of investment trusts (IT) is that their returns are better over the longer term than the equivalent unit trusts. However, that picture isn’t black and white.  In the first release from our new investment trust research seeking to dispel some myths, we look at this key area: long term performance. Here are some of the early numbers.
 
For any successful investor, performance after fees and charges is THE key measure. An expensive fund that leaves its peers in the dust is preferable to a cheap fund that achieves mediocrity at best.
 
In the reading and research that we’ve done around investment trusts we’ve seen claims that:
  • unit trusts are more likely to outperform investment trusts over shorter periods of time (five years or less for instance).
  • But investment trusts “regularly” perform better in the “vast majority” of sectors over longer periods (i.e. ten years or more).
Before we get into the detail let’s be clear: comparing the performance of funds over a given period – 3 years, 5 years, 10 years etc. – only tells us which did better with the benefit of hindsight.
 
In order to benefit from that performance, you’d have needed prior knowledge of which fund was going to do better before investing, which is impossible.
 
What investors need is a process. That process needs to allows them to select funds that will maximise the probability that they will outperform the average. Using hindsight to select funds isn’t an option.
 
Now let’s look at the argument that ITs outperform UTs over longer time periods. 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 today, as shown in the tables below.  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.  At our review point, we select the top 3 funds from the prior 6-months, hold them for 6 months and then repeat the process at our next review point.
 
We ran the numbers for the six different 6-monthly periods (Jan/July, Feb/Aug etc.). We then compared the average return for both investment trusts and unit trusts.
 
Using Dynamic Fund Ratings to select funds in the IT and UT sectors produced the following results over 10 years (tables 1-3):
  • The unit trust returns were outstanding for UK All and UK Smaller Companies sectors, beating investment trusts by 42% and 91% respectively.
  • …but unit trusts did underperform investment trusts in the UK Equity Income sector by 30%.
 
Applying Dynamic Fund Ratings to unit trusts gives better returns for UK sectors targeting growth.  The UK Equity Income sector is a bit of an outlier here, as was the case in our original research (you can see that here).
 
Keep an eye out for more investment trust research in the coming weeks.
 
FURTHER READING
 
Tables 1-3: Dynamic performance for Investment Trusts and Unit Trusts over 3, 5 and 10 years for the main UK sectors (bold shows highest figure for each period)
 

Table 1

UK All Companies
 
 
 
 
3yr
5yr
10yr
Dynamic Investment Trusts
33.7
81.8
134.0
Dynamic Unit Trusts
34.1
85.3
176.5
Unit Trust sector average
22.0
49.3
93.4
 

Table 2

UK Equity Income
 
 
 
 
3yr
5yr
10yr
Dynamic Investment Trusts
23.0
63.9
160.2
Dynamic Unit Trusts
30.3
72.1
130.5
Unit Trust sector average
17.8
46.1
93.8
 

Table 3

UK Smaller Companies
 
 
 
 
3yr
5yr
10yr
Dynamic Investment Trusts
71.7
102.9
169.0
Dynamic Unit Trusts
56.6
123.0
260.6
Unit Trust sector average
48.1
93.7
191.4

 

Notes
  • We’ve used the UT sector average for the analysis so that we have a consistent point of comparison across the UT and IT research.
  • The number of possible funds available to investors varies between IT and UT sectors, with many more available in the unit trust sectors.
  • Although number of funds available isn’t an excuse for either outperformance or underperformance.

Number of funds in investment trusts (IT) and unit trust (UT) sectors
 
IT funds
UT funds
UK All Companies
15
283
UK Equity Income
24
101
UK Smaller Companies
20
51
 
Topic: Fund analysis


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