When running portfolios in the City during the 1980s and 90s, investment trusts were regularly used when seeking smaller company and overseas exposure for larger portfolios – individual stock selection within the FTSE 350 otherwise being the norm.
Clients would often enquire about them, for they were ‘novel’ to many when compared to the more familiar unit trusts.
But over time clients came to appreciate their superior qualities. This remains true today. So why is it investment trusts remain the City’s best-kept secret?
After all, there is evidence confirming they perform better and are cheaper than the unit trusts which today dominate the nation’s investment and savings market. The financial media and professional organisations, including the good work of the Association of Investment Companies (AIC), the industry’s trade body, have certainly raised the profile of investment trusts.
Changes to financial regulation are also proving helpful. Yet while things are improving, there is a long way to go before investment trusts enter the ‘mainstream’.
Perhaps there is scepticism about the evidence regarding better performance. Chapter 2 of The Financial Times Guide to Investment Trusts looks at this in detail. It highlights recent research from the AIC which compares the performance of investment trusts to both unit trusts and OEICs in 13 key sectors over a 10-year period to 31 December 2019.
It shows investment trusts have outperformed unit trusts in 10 sectors. What is more, the margin of outperformance is significant – averaging 33% over the 10 years, even when the three underperforming sectors are included.
Performance is also compared to benchmarks. Here again, investment trusts shine. They produced better returns than their benchmark indices in 11 of the 13 regional sectors analysed. And, once again, the margin of outperformance is significant – averaging 42%, even when including the two sectors where trusts underperformed.
Just as damning for unit trusts and OEICs is the fact that, over the same 10 year period, not only did they come second to investment trusts in all but three sectors, but they also only outperformed their benchmarks in seven of the 13 sectors. Even then, the margin of outperformance was small when compared with investment trusts.
Despite this compelling evidence of superior performance, too many investors continue to be unaware of investment trusts or think them too complex. Yet they are needed today more than ever. At a time when there is a growing financial ‘advice gap’ and the cost of advice is rising, investors would benefit from better harnessing their potential.
Better understand investment trusts
The Financial Times Guide to Investment Trusts will help investors better understand investment trusts and how they can best be harnessed to achieve financial objectives. Characteristics such as their structure, gearing and discounts are explained, as are their more nuanced characteristics which all help to determine how trusts perform and are perceived.
The book also highlights the stepping-stones to successful investing, the principles of sound portfolio management, and how to construct and monitor a trust portfolio. Such knowledge is not only important but necessary. For the evidence suggests better investing can help to reduce inequalities within society – why else do the rich keep getting richer? The financial community needs to do more to both inform and help investors achieve better returns – particularly those with smaller portfolios.
The final section of the book features how we put theory into practice, for actions speak louder than words. By way of illustration, the thinking and strategy behind one of the nine real investment trust portfolios managed in real time on my company’s website is explained in some detail – together with the various factors we consider when selecting holdings. Knowledge continues to be the bedrock of successful investing as the website’s open ‘Performance’ page testifies.
The book aims to explain the potential of investment trusts in a clear, concise and jargon-free manner. It shows their apparent complexity is a myth – a myth which has tended to obscure for too long the wonderful opportunities on offer. Indeed, trusts are now better placed than they have been for a long time to help investors achieve their financial goals.
All it requires is a little patience to better understand them, and then patience when investing to best reap their rewards. I wish you well with your investments.
This content has been created by authors in their personal capacity. Any views, thoughts and opinions expressed belong solely to the authors and do not necessarily reflect the official policy or position of Pearson.