Investment Trusts Trounce Unit Trusts

gadgetmind · 19 October 2011 at 10:02AM

Linton wrote: »

What outperforms are the right mix of sectors. The differences due to sector performance are far greater than differences in investment vehicle performance.

Agreed, but fee drag also makes a massive difference, and minimising this while still being exposed to the sectors and asset classes you need will give you even greater returns.

or where there are passive funds the performance is significantly worse than average.

Really? Over what time frame and how have you established the average for the myriad of funds?

Linton · 19 October 2011 at 10:21AM

Here is a comparison between ITs and UTs based on sector - data from trustnet. Unfortunately ITs and UTs adopt a different set of sector names and so only some sectors can be directly compared:

% Return over 5 years

Sector ITs UTs

Asia Pac Exc Japan 91.8 56.0
Asia Pac Inc Japan 23.1 32.3
North Am Smaller Cos -10.7 26.0
Euro smaller cos 2.9 16.0
UK Smaller Cos 15.3 10.6
North Am -3.9 10.4
Japan -18.5 -12.1

I havent done a statistical analysis but what the numbers seem to show is:

1) Sector differences are far more important than investment vehicle
2) There is no clear advantage of going for either UTs or ITs. The performance differences look pretty random, though the majority of sectors actually favour UTs.

Meeper · 19 October 2011 at 10:59AM

So - if we want to debate the merits of IT's against UT's, let's get a little more information rather than the drum-beating that goes on in this forum on a regular basis against UT's and IFA's in general.

The biggest problem with Investment Trusts is that they are complicated. Unit trusts just come with a price, but investment trusts come with a net asset value, a price and (normally) a discount. It is hard, therefore, for the ordinary investor to figure them out – something that isn't helped by the fact that the sector does almost no effective marketing.

In 2013, the paying of commission to IFAs by unit trust providers is to be banned. So investment trusts will suddenly find themselves on a level playing field in terms of advice – the IFA will no longer have an incentive to ignore investment trusts, not that the best ones do anyway, under the right circumstances. That means that everyone will immediately look to their virtues (price and performance) and pour into the sector.

However, I don't think it is going to be quite so easy. This is partly because the removal of the commission bias won't help with the knowledge bias. The average IFA is well over 50 and the odds are that he'll be as ignorant of the workings of investment trusts in 2013 as he is now, regardless of how he gets paid. The shift with RDR is bringing a much younger and better qualified IFA to the fore, however, so this is also likely to change.

Investment trusts are in danger of losing the thing that makes them most attractive: their low charges. The Association of Investment Companies proudly says that "almost a third of investment trusts have charges of less than 1% a year".

That sounds good, but it isn't: it means that two-thirds charge more, an average in fact of 1.76% a year. That's up from 1.4% in 2008 and – if you take commission payments out of the equation (they'll be gone in three years) – it looks higher than the average for unit trusts.

Worse, a large number of trusts are introducing performance fees. If you ask a fund manager about these, he will say that they are what investors want. But that isn't true - performance fees are what managers want.

If you had invested £1,000 in 1965, your investment could have been worth £4.3m by the end of 2009. However, if the manager had charged a 2% management fee and a 20% performance fee on any gains, you would have ended up with only £300,000. The other £4m would now be in the manager's pocket. Performance fees make managers rich quick, not investors. If we have paid a management fee, haven't we already paid the manager to do his best?

Ark_Welder · 19 October 2011 at 11:19AM

gadgetmind wrote: »

How do you decide whether to use a fund, IT or tracker?

Majority of holding are in ITs. I have been looking at some old spreadsheets and found the following:

Fleming Chinese plc
Fleming Emerging Markets plc
Fleming Far East plc
Fleming High Income plc
F&C Smaller Companies plc
Kleinwort Endowment Policy Trust plc
M&G Income Investment Trust plc - Units
Murray Johnstone International I.T. plc
Perpetual Japanese plc
Second HGSC Index plc [a tracker!!!]

Would anyone like to guess the year...?

As posted earlier in the thread, the company structure of ITs make it inefficient for them to have bonds as their primary asset type. Whilst there are a few ITs, there is a wider offering in the OEICs/UTs arena covering trackers and from sovereigns to high-yield corporates. There is even a european MBS offering (although I would be more inclined to use an IT for this).

There are also a few multi-asset OEICs that I have, but they are not fund-of-funds. Whilst some of the more generalist ITs have attempted to move into this they do not appear to have had the same degree of success (although one of my OEICs is reasonably new so it still remains to be seen whether this will either). Plus, the platform through which I hold these particular OEICs rebates all of the charges payable to the platform - making their annual cost lower than some of the ITs in this arena.

I also hold some OEICs that write covered options on their portfolio, for a bit of extra income generation. I think that there were one or two ITs that were trying some of this approach but not to the same extent. These OEICs should do OK in slowly rising, falling, or flat markets, it's the fast rising and volatile ones where they suffer...

Trackers would depend upon the market: I might consider on for the S&P500 if I wanted specific exposure to the US, and a FTSE250 or possibly All-Share if I was expecting sustained growth in the medium term. But I'm not, and in any case, performance of 'the market' isn't a fixation for me: I'm more interested in a sustainable and growing income over the longer term whilst generating enough in the immediate term to have a comfortable existence (plus pay for a new car at some point...:().

I do have a few individual shares but I don't try to kid myself that I have either the time or the inclination to do enough detailed analysis to decide one from another over enough of them to be able build a resilient portfolio. And I'm not one for having something simply because other investors do have. I may do more in this area at some point, but with the intention of writing options on some of them: a lot more work required, though, plus there would be the potential for uncontrolled CGT events and holding charges to consider (and these aren't the cheapest).

darkpool · 19 October 2011 at 11:32AM

Ark_Welder wrote: »

The point is that I get bored by the same old story in your posts. You don't bring anything new to any debate. Perhaps if you had something genuine to add then there might be a more interest.

i do believe that UTs are really for complete rookies and people that aren't sophisticated investors. i think there has been a lot of evidence put forward that ITs and trackers are better than UTs. So far there has been little evidence put forward by the UT advocates.....

Should there not come a point when even the most die hard UT fan realises there are better investments?

If you don't find my posts interesting why do you respond to them? If you find my posts dull you could always put me on ignore.... but unfortunately i bet you'll keep on responding

Linton · 19 October 2011 at 12:18PM

gadgetmind wrote: »

Really? Over what time frame and how have you established the average for the myriad of funds?

Go to trustnet
Choose a sector
Sort by performance over 5 years (or whatever you want)
Look to see how far up the list the trackers come.

If you want a good idea on how trackers can really let you down look at the IUKD ETF which tracks the FTSE Dividend+ index very closely.

If IUKD was a fund in the UK Equity Income sector it would be 73rd out of 76 funds for 5 year performance.

Another example: DJSC ETF which tracks the EURO STOXX Small Index. If it was a fund in the European Smaller Companies sector it would be 12th out of 12 funds for 5 year performance.

It really is horses for courses. In some sectors trackers may be reasonable eg FTSE100, in others they are a disaster - eg the ones described above.

Why are trackers useless in small companies and income sectors: IMHO because both sectors contain shares which are there for the wrong reason. Companies may be high yield because they have crashed in value without (yet) ceasing paying dividends, companies may be small because they were once larger. Trackers cant identify these likely undesirables.

The lesson is that you need to do your research and choose suitable funds for your purpose.

saveonarola · 19 October 2011 at 12:28PM

Interesting thread. I'm a bit late, but I want to come back to this strange observation of the original article, namely that individual ITs show a greater consistency of performance than individual UTs, and what could explain this (if it's true).

Gearing

This could explain out-performance, but not consistency of performance.

Fixed asset pool/lower dealing costs

As I understand it, dealing costs are absorbed within the TER of the UT/IT, so that wouldn't explain discrepancy of performance between UTs/ITs with similar TERs. It might explain why some ITs have lower TERs, but again this would explain out-performance, but not consistency of out-performance.

Closed-end nature of funds allows for longer-term strategy focused on investors

This seems plausible. UT managers are judged on assets under management as much as on performance, so they thrash around (nice image, gadgetmind), trying to beat the index, in order to keep investors on board. However, this raises as many questions as answers. If the longer-term strategy of ITs was so obviously superior, this would apply across the board. But as the figures quoted by Linton show, this is far from being the case.

Linton wrote: »

% Return over 5 years

Sector ITs UTs

Asia Pac Exc Japan 91.8 56.0
Asia Pac Inc Japan 23.1 32.3
North Am Smaller Cos -10.7 26.0
Euro smaller cos 2.9 16.0
UK Smaller Cos 15.3 10.6
North Am -3.9 10.4
Japan -18.5 -12.1

Also, if there was a particular investing style that was obviously superior, you would expect it to be more widely known. And it would be extremely unlikely that UT managers would adopt a different style, knowing it to be inferior.

But if the consistency of performance cannot be explained by strategy, then the only explanation left, once again, is manager skill. But if manager skill explains the consistency of performance of individual ITs, then you would expect to see the same consistency pattern for UTs, and from what I've read the evidence for manager skill is thin, at best. Certainly nothing like the obvious and clear pattern that the original article suggests. But the only explanation for a different, greater pattern of skill-based consistency in ITs would be that there was a much higher percentage of skilful managers in the IT world! Can this be true? Are IT managers the 'cream of the crop'? Are they paid more?

Sorry to ask so many questions without providing any answers. To answer these questions would take a lot of research, probably beyond my skill level, certainly beyond the time that I can invest at the moment. I hope others agree that this is interesting, though. If the contention in the original article is right - that ITs show a greater consistency of performance over time - it would be the clearest evidence that I've seen for some sort of strategy or skill premium. Which is why I would need a lot more proof before accepting this claim.

BLB53 · 19 October 2011 at 12:35PM

Here's an article from TiM website to throw into the mix

http://www.thisismoney.co.uk/money/investing/article-2050637/A-secret-worth-sharing-Investment-trusts-low-fees-great-returns-forgotten.html

gadgetmind · 19 October 2011 at 12:46PM

Linton wrote: »

Go to trustnet
Choose a sector
Sort by performance over 5 years (or whatever you want)
Look to see how far up the list the trackers come.

With over 3000 UTs out there, some are going to beat the market, it's just that you can't predict which ones will do it, and their past performance has been shown to tell you close to zero about the future.

If you want a good idea on how trackers can really let you down look at the IUKD ETF which tracks the FTSE Dividend+ index very closely.

Does anyone *really* think of IUKD as a tracker? I certainly don't.

Meeper · 19 October 2011 at 1:07PM

Interesting that there has been no response to my post giving a more rounded view on the IT vs UT issue. How strange.

Investment Trusts Trounce Unit Trusts

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