Fact - Investment Trusts beat Unit Trusts/OEICs so why is the investment industry resistant to them


We share the latest evidence that reveals yet again that not only do investment trusts outperform open-ended funds, but they do so substantially, and
[See the full post at: Fact - Investment Trusts beat Unit Trusts/OEICs so why is the investment industry resistant to them]


It’s just a sea of red. I think it is just un-bloody-believable.

I have been investing in investment trusts for only the last 18 months or so but when I talk to my mates so many of them just couldn’t tell you what an investment trust is.

I think the Government should be teaching this to kids in schools.


I work in financial services and have jsut been showing the table above to colleagues in my office. Their reaction — they don’t beleive the data!

I have more work to do with them but pretty compelling reasoning to invest in investment trusts IMHO.




The way to eliminate the narrowing of discounts over the past 10 years is to use the NAV total return figures for investment companies rather than share price TR. It would be interesting to see an equivalent table that uses this data. If we assume that the past 10 years’ narrowings will not - or cannot - be repeated then NAV TR might be a better indicator as to how the two fund types might perform relative to each other over the next 10 years if the direction of markets is in a generally upward direction

What would also be interesting to see are the discrete yearly returns of the two fund types. These should show the negative effect of gearing on the NAV of ITs relative to OEICs during down years, and the share-price TR would potentially show the negative effect of widening discounts. I am being a bit of a devil’s advocate here (in case you’re worried!), but I do think that it would be beneficial for investors in ITs to be able to see what could happen in the event that markets were to take on a downward trend for a few years.


@ArkWelder but isn’t it the total return that matter most love? I get your point about the discounts narrowing so much that they can’t narrow anymore, but who is to say when the next crisis erupts and we go through the who shebang again.

What do you mean by the negative effect of gearing? Are you referring to if there was a downturn and investment trusts were highly geared?


@arkwelder I’m not sure what purpose your suggestion would serve. I understand that because unit trusts don’t have gearing then NAV is more comparable but wouldn’t that eliminate at least one of the important advantages of trusts?

I have only been using investment trusts for a few months so I might be missing something here. I’ve learned about trusts largely on this site and on the AIC site but this site is good because of the forums (for want of a better term) and you have posted a number of very interesting and helpful responses.

I used to invest in shares a lot but I’ve little time to study them which is why I’ve turned to fund managers instead.


@MumKnowsBest, but which total return? Assuming that you mean the one for the share price then yes, I agree that this is important because it is what the investor gets back in their pocket - and you can’t get much more important than that!

But if one of the reasons for ITs’ general outperformance versus OEICs over recent years has been the narrowing of discounts, then for us to go through the same process again the discounts are going to have to widen back out before they are able to narrow again, and this is likely to be more detrimental to IT share price performance when compared to OEICs. In a few years’ time we might end up be presented with a similar table to the one shown in the article but with the colours reversed.

Which leads on to the effect of gearing in a downturn. Perhaps the best example of this is to look at the fund house Aberforth. They run very similar open and closed end funds which have near identical holdings, both in number and their weightings. When markets are rising the NAV of the IT tends to rise more than the OEIC. When markets fall the IT’s NAV has fallen more. This latter case being what I mean by the ‘negative effect of gearing’. Repeat over a couple of years and ITs could underperform against OEICs. Although, as with all historic data, even thes should not be taken as a 100% reliable guide to the future because there are always examples to be found where the IT has held up better than the equivalent OEIC - as the 2011 annual return for Lowland versus Henderson’s OEIC demonstrate. Also, the net gearing on ASL has been reduced in recent years so this should have less of a negative impact on the IT in the future too - so changes to gearing are also something to monitor.


@sammyqr, because ITs are traded on a stock exchange, changes to their share prices are a function of investor demand. Changes to the NAV, however, are a the result of manager performance, just as with an OEIC. If an IT does use gearing then the effect of this will be to magnify those changes to NAV, both up and down. So the NAV does include the effect of gearing, and not specifically the share price.

Thy I’m comparing NAV returns for OEICs and ITs isn’t to eliminate the effects of gearing, it is being done to compare the performance of the fund managers. If we accept the notion that discounts on ITs have had a general one-off narrowing over recent years which is unlikely to be repeated anytime soon, then IT share prices are unlikely to outstrip their NAV returns to the same extent as they have done in the recent past. The conclusion being that the historic performance of IT and OEIC NAV returns are likely to give a better indication of the potential relative performances of ITs versus OEICs than will comparing OEIC NAV returns with IT share-price returns.

I don’t just use IT NAV returns for comparing against OEICs either. I also use them to compare ITs against each other. And this is for the specific reason that the NAV returns are the result of manager performance (where ‘performance’ includes how gearing has been utilised) and share prices show the fickleness of investor sentiment: the NAV is the light, the share price is just a moth!


@CityGirl - exactly, re the data issue. I have the same issue with other IFAs. So, a little tongue in cheek, who’s figures would they trust - a company or a life office?!


Quite @SammyQR! Most IFAs site the gearing and discount compression as the excuse that ITs beat their beloved open-ended funds. But @MumKnowsBest is right in pointing out that we invest for a better return. However, for technical comparisons one should try and strip away gearing and look at NAV, but should you remove fees too so you end up with the Fund Managers true worth? Where do you stop?

If I knew a fund manager was very good but stood at a 10% premium I would leave him well alone and look elsewhere, or wait. That is the point missed by many who use open-ended funds, you have to build in other factors to your decision process as to when to get in, and out, and not just look at who was top of the tables.


In downturns ITs tend to underperform - mainly because of the gearing and discount widening, not to mention wider spreads in some cases. Today we do have a lot of ITs at premiums, although the current correction is reducing this, and I still doubt this is a brave new world and we need to watch especially carefully for the pop when the “income bubble” bursts. But the gearing is currently very modest compared with previous positive periods like 2003 to 2007. Many have none. This leads to opportunities to pick up stocks with an over-reduced price (the Buffet method of investing)!

The most heavily geared ITs are Split Capital trusts and I hope to do a blog on them soon which should be timely given the current market as these could suit some and provide quite a bonus, until the next dive!