Benefits for the more sophisticated

Investment trusts have had a difficult year but for serious investors who do not try to be too clever they offer advantages worth exploring, notably in property and smaller companies.

The past year has not been easy for investment trusts – the daddy of the professional investment management world.

While the closed-ended structure they enjoy has afforded them some protection from the turmoil that assailed markets, share price performance has disappointed, with open-ended funds generally turning in a better performance.

It is not difficult to find the cause. As has been so often the case, unsettled markets led to a widening of discounts and a consequent deterioration in share price performance compared with that of asset values. By the end of 2008 the average discount was approaching 17%, although more recently it has returned to the long-term average of 10%.

However, in early 2006 the discount dropped to below 4% and remained under 6% for some little while.

The fact that the share price of investment trusts can fluctuate against the value of the underlying assets does make them harder to assess than some other investment vehicles. That, and the fact that many investment trusts are able to borrow and gear their portfolios, has made regulators view them as generally more risky than open-ended investment companies. They are, though, much more suitable for accessing illiquid asset classes, as an examination of the performance tables bears witness.

The Association of Investment Companies divides trusts into more than 40 sub-groups for performance purposes, some of which have a universe of a single company. There is only one trust specialising in Canadian income, for example and, less surprisingly, just a single litigation trust. But many sub-sectors equate to those used by the Investment Management Association, though it is worth bearing in mind that the investment trust universe is significantly smaller at fewer than 300, if venture capital trusts are excluded.

The top end of the performance tables is dominated by trusts committed to emerging markets – at least, so far as the longer time-frames are concerned. Short-term, the experience is more mixed, although the returns achieved in 12 months far exceed the performance of markets in general. Gartmore Growth, a trust specialising in smaller companies, leads the field, returning more than 50% compared with a modest decline on average for the 19 trusts in the sub-sector.

Three of the best-performing trusts over three years fall into the emerging markets category and all of the top five in the five-year tables exploit these lesser-developed markets. Many of these trusts have been around for several years. While over 10 years mining shares and smaller companies feature strongly, the best-­performing trust actually outpaced its nearest rival by more than double.

Rewarding its shareholders by multiplying their value nearly 14 times, JP Morgan Russian Securities was launched as the Fleming Russia Securities fund, the successor company taking over at the end of 2002. Its recent performance has been less impressive. In the year to the end of last August the shares nearly halved. Indeed, the three country specialist funds – Ireland, Russia and the Ukraine – fell by nearly 40% over this period, with the Ukraine Opportunity fund, run by Fabien Pictet, shedding nearly 80% of its value.

All this, of course, supports the cautionary argument applied to investment trusts, but the benefits they hold for more sophisticated investors are very real. There are now many trusts offering exposure to hedge funds – something less easy to achieve with open-ended funds unless exit restrictions are applied. Property, too, seems a natural asset class to access through an investment trust structure. While neither sector has rewarded investors recently – although BlueCrest AllBlue in the hedge fund category ranked seventh over one year and topped the three-year table – they are ­worthy of consideration for a broadly spread portfolio.

Property in the investment trust world is divided into several camps. There is British direct property and property securities, along with trusts specialising in Europe and Asia Pacific. It has been the property securities trusts – those that own property company shares – that have enjoyed the easiest time recently. But some of the trusts investing directly have held up remarkably well, though those with gearing have suffered severely.

Perhaps smaller companies is one of the most interesting sectors that might be considered more mainstream. There are 19 trusts in the UK Smaller Companies sector and, while on average they delivered a modest fall in the year to the end of August, it was the Gartmore fund that topped the charts, while ­Gresham House came a creditable second over 10 years.

An examination of the overall performance tables leads me to believe that the advantages trusts have are worth exploring, that certain asset classes are better accessed through these closed-ended structures, but that trying to be too clever will not necessarily deliver any rewards.

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