Investment Trusts Trounce Unit Trusts

Linton

darkpool wrote: »

i can understand that different investments have different characteristics. however, overall ITs and UTs are generally designed to do the same thing. but there has been evidence presented that ITs on average outperform UTs and have lower charges. ...
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That is where you are fundamentally mistaken...

Both UT and ITs (less so with ITs I think) comprise a very wide range of funds that are designed to do a wide range of different things.

For example:

a - investment asset - you can have equity (shares), bonds, property, commodities (natural resources, agricultural products) etc
b - Income or growth: does the customer want a steady flow of money now or is s/he prepared to wait say 10 years in the expectation that the value will grow.
c - Risk: does the customer care if the aim isnt met because the reward is very high if the aim is met. So at one extreme you have a horse race which is a one-off all or nothing gamble. At the other extreme you have a Gilt where you will, as certainly as anything can be, get your income but it wont be high.
d - Variability: will the customer be upset if the fund drops 50% in the short term, or is s/he prepared to lose some possible return for something more stable.
e - Niche or general: does the customer want the fund manager to allocate money between all the possible investments or does the customer want to do that themselves. In the latter case the customer wants to be very sure that the fund manager really is completely focussed on one particular sector/risk/income requirement etc.

For niche funds there are a large set of niches one can chose.

Now when an experienced investor is chosing what to invest in next all the above factors and no doubt others which didnt immediately come to mind will come into play. I guess you can see that having made the above choices the number of UTs in a short list could well be pretty small and (this is a key point) the number of ITs much smaller, often close to zero.

It is at this stage that the experienced investor will decide what fund to chose. This could be involve consideration of past performance, the record of the fund manager, the size of the fund, and yes, possibly charges, UT ir IT, passive or active, and no doubt other factors.

Hopefully you can see in the above environment a blanket statement that ITs are better than UTs becomes pretty meaningless. Talking about the average UT or average IT again means nothing.

If any novice investor decides up front that ITs are where they will place their money they are making a fundamental mistake.

gadgetmind

Linton wrote: »

If any novice investor decides up front that ITs are where they will place their money they are making a fundamental mistake.

Agreed, but a less expensive mistake than going for the latest-and-greatest uber-trendy high-fee OEICs, which are far more likely to be offered/advertised to them.

Linton

gadgetmind wrote: »

Agreed, but a less expensive mistake than going for the latest-and-greatest uber-trendy high-fee OEICs, which are far more likely to be offered/advertised to them.

Depends on the sector etc far more than a fraction of a % in fees.

darkpool

the article below is from the FSA. Oh well, what does the FSA know about investment? Same with pricewatercoopers, who are they to say that fund performance is random? every UT investor knows that a complete amateur investor can just avoid the dog funds.

"People pick funds largely on the basis of (strong) past performance. Past performance
is the reason people cite most often when asked why they chose the fund
they did, and past performance also lies behind many of the other popular reasons
that people cite (e.g., press recommendations).81 Furthermore, people do exactly
what they say: studies of net fund inflows find that they are highly sensitive to
past performance (Ippolito [1992], Sirri and Tufano [1993], Chevalier and Ellison
[1997]).
Investors appear to give explicit charges (let alone implicit costs) little thought.
AUTIF’s survey found that only 14% of respondents cited “reasonable charges” as a
reason for choosing the fund they did, and the SEC/OCC’s [1996] survey found that
only 19% of investors even knew their largest fund’s annual expense ratio.82

Unfortunately, focusing upon past performance and ignoring costs is not a consistently
good way to go about selecting a value for money investment fund. Recall
that a given fund’s MP1 is likely to be high when the gap between that fund’s net
return and the market rate of return (RGap) is likely to be large. And while it is true
that good performance will reduce that gap, a good past (gross) performer has a
no more than random chance of being a good long term future (gross) performer
(WM [1999], PricewaterhouseCoopers [1998], Quigley and Sinquefield [1999])."

This extract is from the same document. It type of makes sense to me, if i was a fund manager with a new fund i would take pleny investment risks. If the risks pay off there will be a million 'tard simpleton UT investors wanting to invest money in my UT. If the risks don't pay off I close the UT. Simple

"To see why this might be, begin by considering the possible strategies available to
a new fund. A fund acts to maximise profit, which is a positive (and probably nonlinear)
function of funds under management and continuing charges (I ignore
upfront charges here for simplicity).84 Given that investors behave as described

above, how would a fund choose its risk profile and charges so as to maximise
profit?85

Since new investors pick funds that beat the market, a fund will have an incentive
to take risks so as to try to become a top performer. This risk-taking is worthwhile
because while new investors select funds that have done well, a fund’s incumbent
investors tend to remain in the fund barring disastrous underperformance. 86 It
follows that increasing risk has more upside than downside. Consequently, funds
(especially new funds) will tend to adopt a relatively risky strategy. 87"

darkpool

Linton wrote: »

Depends on the sector etc far more than a fraction of a % in fees.

you've already said UT fund managers have no idea of the amount the investor pays in fees. how can you say there is only a fraction of a % difference between a IT and UT?

jimjames

Lokolo wrote: »

No it doesn't, but it's too complicated to put it in. When fund managers buy they don't get charged an explicit amount, but rather the IB will just take a comission and add it to the cost, so the fund won't actually know what part was a charge and what the price they got for the investments.

Ok, if its too complicated thats fine but it still doesn't get over the difference which I believe is at least partly behind the outperformance. On the whole there is much less trading by an IT compared to a UT. Having money constantly coming in must mean higher trading costs as that money needs investing or the fund will lose performance in a growing market or have a very high percentage cash assets.

An IT does not have the constant flow of new money so can keep investments without trading for a much longer period of time.

Lokolo

jimjames wrote: »

Ok, if its too complicated thats fine but it still doesn't get over the difference which I believe is at least partly behind the outperformance. On the whole there is much less trading by an IT compared to a UT. Having money constantly coming in must mean higher trading costs as that money needs investing or the fund will lose performance in a growing market or have a very high percentage cash assets.

An IT does not have the constant flow of new money so can keep investments without trading for a much longer period of time.

Not saying it doesn't have an effect! Although I agree that more trading means higher costs from trading, but sometimes it can mean being able to pick things up cheaply (haggling with IBs for example).

UTs do usually have a pot of cash which they keep separate from the rest of the fund because of units being bought and sold, this isn't going to massively effect performance, although it will.

But also saying that, having cash constantly coming in means the FMs can buy into other opportunities that ITs may not be able to (especially if they have already leveraged too much).

Swings and Roundabouts. Each have their advantages and disadvantages.

Ark_Welder

darkpool wrote: »

if i was a sceptic i would think UT fund managers hid dealing costs from the mugs that buy UTs.

darkpool wrote: »

If the risks pay off there will be a million 'tard simpleton UT investors wanting to invest money in my UT. If the risks don't pay off I close the UT.

The insults that you always resort to merely highlight your childish trollness.

competitionscafe

Along with (lower) charges, gearing seems like a reasonable explanation for long term outperformance and can obviously work the other way round too:

"Investment trusts tend to lose more in downwards-moving markets because they have the ability to gear, but offset that by gaining more when markets rally.

For example, in the financial crisis, our data shows the average investment trust losing 47 per cent between August 2007 – when credit market froze – to March 2009, when markets bottomed out, while the average open-ended vehicle lost 23.7 per cent. "
http://www.trustnet.com/News/Research.aspx?id=274863

saveonarola

saveonarola wrote: »

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.

jimjames wrote: »

My understanding is that TER doesn't (despite the name TOTAL) include all costs associated with buying and selling shares in a fund hence a fund that trades less will have lower costs all other things being equal.

Lokolo wrote: »

No it doesn't, but it's too complicated to put it in. When fund managers buy they don't get charged an explicit amount, but rather the IB will just take a comission and add it to the cost, so the fund won't actually know what part was a charge and what the price they got for the investments.

Thanks for that - a real eye-opener. I was confused, I think, because people often fail to distinguish between the costs of buying into the fund and the cost of buying and selling securities within the fund, using terms like 'dealing fees' and 'trading fees' interchangeably to mean one or the other or both. I went looking for more information and found this piece from the Telegraph, which sums up the situation very clearly:

So does the TER include all the costs that I pay?

I'm afraid not. The TER does not include the trading costs – the costs for buying and selling shares within the fund. The more active a manager is in trading the underlying portfolio, the higher these costs. [...]

Can I compare the true costs of investing in different funds?

No. Trading costs range from about 0.09 per cent a year to one per cent. "The AMC is a quite useless figure; the TER is misleading because it is not total – it does not include dealing charges or, if it's a fund of funds, the charges on the underlying funds," says Mr Waller.