Investment Trusts Trounce Unit Trusts

Lokolo

darkpool wrote: »

but you might as well go for ITs which have been shown to outperform UTs in the last decades? if you were an IFA how could you justify investing clients' money into UTs as opposed to ITs?

or do we just start ignoring evidence?

Did you even read my post?

I was trying to get at the fact it doesn't matter if one beats the other on average, no-one wants to buy an average fund, they buy one which suits their needs and they will want the best.

In my previous post I showed that BMWs have faster acceleration than a Ford, but when we look in detail, we can see a Ford Focus ST has better acceleration than a BMW 1 series. As I said, it's down to the individual investment, not the broad term. You seem to think that from my example, you should always buy a BMW, which may not suit you.

It's a bit like your argument that trackers are better than managed. Over the average - who really cares, it's down to the individual investments and their performance which matters.

Meeper

Unfortunately, many people in this thread are unwilling to look past their "IFAs are only in it for the commission" and "you can do it yourself, you don't need an adviser" and "IT's are better than UT's, period".

There is, I fear, no point trying to reason with these people. My long-ish post on the previous page gives some explanations as to why IT's are not as attractive as they may seem, and I didn't even talk about the potential for IT's in the same asset allocation as a UT being higher risk due to the leveraging options available to the manager in an IT. Yes, potentially higher rewards. Also potential for higher risk to get them. And, of course, the stamp duty payable on the purchase of Investment Trusts.

Rollinghome

Meeper wrote: »

Yes, potentially higher rewards. Also potential for higher risk to get them.

I'm afraid that's an extremely simplistic generalisation. There are many unexciting ITs with very low risk that have been successfully plodding along with low risk since the 19th century, long before UTs existed, and there are also some extremely risky UTs - as the collapse of Arch Cru (which paid IFAs unusually high rates of commission) again showed. To suggest that higher risk atomatically lies with one or the other would be foolish.

Anyway, I'm full of hope that when RDR is implemented at the end of next year we will see rather more IFAs with a better understanding of all investments, including ITs, rather than just those that pay them commission.

competitionscafe

BLB53 wrote: »

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

Bit of a one sided argument in that article from "Ben Yearsley, investment manager at financial advisers Hargreaves Lansdown"

"The disadvantages of investment trusts

(Ben Yearsley) also mentions two potential disadvantages of investment trusts. One is that they can borrow to invest, called gearing. This increases your return when times are good — and your loss if the investment goes sour.
The second is the pricing of investment trust shares. This depends on the supply and demand for them, as well as the actual worth of the investments.
So if your trust holds shares in a popular sector or country, you may have to pay a premium of a few per cent to buy in.
On the other hand, if your trust is out of favour, you might have to sell at a discount or loss."


Not surprising considering how HGL makes their money but he is only giving one side of the argument - both gearing and discounts can be a potential advantage or disadvantage. (Gearing and narrowing discounts can also enhance performance).

I (and probably many on here) hold a mix of IT's and OEICS -for a number of reasons. I don't think it need be exclusively one or the other.
As for performance figures of one vs the other, showing figures for any one time period doesn't prove much one way or the other - consistent outperformance over a wide range of time periods would be much more compelling evidence.

A valid point made above about the charges too - if you factor in the no initial charge + commission rebate on OEIC funds from Cavendish etc then many OEICS do have a similar TER to investment trusts. Although there are a few of the large global investment trusts for example which do have a very low TER.

There are also far fewer IT funds in each sector, for example UK smaller companies: IT 17 vs OEIC 59. Perhaps the higher number means more chance of a handful of 'dogs' bringing down the average performance figure? On the other hand perhaps a higher number of funds means that there is more chance of there being a couple of 'high flyers' which raise the overall performance figure?

Perhaps there is more chance of a couple of really high flyers appearing in the IT sector due to enhanced performance from a narrowing discount and gearing whereas there is more likely to be a couple of consistent poor performers in the OEIC sector? (IT's which consistently perform poorly often tend to be either liquidised or merged with another fund or at least have their fund manager replaced, which is easier due to there being in most cases a separate board of directors and manager of the funds). Again taking the UK smaller companies sector - Invesco English and International Trust and Framlington Innovative Growth Trust for example are 2 IT's which have 'disappeared' in recent years, while others have had a change of fund management company, eg Throgmorton Trust dropping Framlington and appointing BlackRock.

So in short, perhaps poorly performing OEICS are more likely to stick around than poorly performing IT's, hence the average performance figures looking better for IT's?

By calendar year: 2011 2010 2009 2008 2007
IT's UK SMALLER COMPANIES -5.0 33.0 58.3 -43.8 -4.2
UT/OEIC's UK SMALLER COMPANIES -8.7 31.6 50.2 -40.5 -6.3

Source:
http://www.trustnet.com/Investments/SectorPerf.aspx?univ=T
http://www.trustnet.com/Investments/SectorPerf.aspx?univ=O

Ark_Welder

Meeper wrote: »

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.

Any investment is complicated if it has not been researched properly. Perhaps you are confusing unit trusts with OEICs? UTs are on a dual-price basis, not a sinlge one. The bid-offer spread between the two is generally wider than the initial charge that it advertised - even allowing for stamp duty. Is that widely understood? OEICs charge stamp duty reserve tax upon an exit from the fund, the costs of which are bourne by the remaining investors in the fund - unless there is a dilution levy in force. Is that widely understood?

Meeper wrote: »

In 2013, the paying of commission to IFAs by unit trust providers is to be banned...This is partly because the removal of the commission bias won't help with the knowledge bias.....

IFAs are aware of the proposals - one would hope - giving them time to expand their knowledge. If they choose to not expand their knowledge then I believe that that would be to their own detriment because they will be less equipped to do the job compared to those that do choose to increase their abilities.

Meeper wrote: »

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".

I agree that more recently-launced ITs have tended to charge higher management fees compared to longer established ones. Some of this is due to the more-specialist nature of the new launches, whereas the older variety tend to be more generalist in nature. Other reasons for higher charges may be because the management company believes that they can.

Meeper wrote: »

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.

The closed-end universe is not immune from performance fees - and not by a long chalk. Nor is the closed-end universe immune from increasing its management charges - Standard Life, for example. Quoting 2+20% is rather disingenuous as it ignores the types of fund that might charge these types of fee. Only a few years ago there was an open-ended fund-of-funds manager that charged 2+20 on top of the underlying individual fund fees - and that was just for sitting on their backsides. The funds were not directly available to retail investors. They got their comeuppance, though, because they went out of business.

F&C IT has removed the performance fee this year, Witan's TER including the performance fee is 1.14% (2011 interim report). I choose to hold an IT that does have 2+20% fees: this year it amounts to TER around 4%. The attraction for me is the uncorrelated nature of its strategy, which has resulted in a NAV increase of around 11% YTD, and was up around 7% in August (does anyone remember August?). OK, the majority of these fees are charged by the underlying open-ended hedge fund rather than the investment trust feeder fund that is more easily available to the likes of me. (investment trust vs. investment company. Discuss...? ). But it is what I want so I accept what I have to pay.

Ark_Welder

Meeper wrote: »

And, of course, the stamp duty payable on the purchase of Investment Trusts.

Stamp duty is payable on unit trusts and is built in to the bid-offer spread. Stamp duty reserve tax is charged by OEICs and is bourne by the investors in the fund unless a separate charge is made to individual investor transactions.

Why try to imply that this tax it is applied only to ITs?

darkpool

Linton wrote: »

Unfortunately too many people are too prepared to accept blindly what they read, especially if it confirms their prejudices.

I'll admit it is human nature to ignore evidence which does not reflect your opinions. however so far no one has tabled evidence to show UTs are better than ITs.

You must admit a lot of ITs trade at a discount to NAV, surely they have to be better than UTs?

darkpool

Lokolo wrote: »

Did you even read my post?

I was trying to get at the fact it doesn't matter if one beats the other on average, no-one wants to buy an average fund, they buy one which suits their needs and they will want the best.

In my previous post I showed that BMWs have faster acceleration than a Ford, but when we look in detail, we can see a Ford Focus ST has better acceleration than a BMW 1 series. As I said, it's down to the individual investment, not the broad term. You seem to think that from my example, you should always buy a BMW, which may not suit you.

It's a bit like your argument that trackers are better than managed. Over the average - who really cares, it's down to the individual investments and their performance which matters.

i did read your post, but it's really just a variation of the "UTs are a brilliant investment if you don't invest in dogs" argument.

it's not much of an investment philosophy unless you have some method of excluding the dogs. i think if you had some surefire way of picking the top performing funds you'd be better employed buy shares.....

Look at the old Xcite thread, it was full of people creaming their pants saying how much the share price was going to rise, they were saying they had researched the share. Yet the share price went down from 450p to 125 pence. Like it or not, the chance of an amateur significantly outperforming the market is poor. I think in the real world the most an investor can expect is an average return....

I could argue that the best investment possible is the National Lottery, as long as you don't pick numbers that don't get drawn....

competitionscafe

Linton wrote: »

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.

Here is a 3 year comparison for what it's worth -

% Return over 3 years

Sector ITs UTs

Asia Pac Exc Japan 104.2 86.6
Asia Pac Inc Japan 67.3 66.6
North Am Smaller Cos 34.1 59.3
Euro smaller cos 52.4 63.6
UK Smaller Cos 67.3 64.6
North Am 106.7 45.1
Japan 52.5 33.4

It's worth noting that some of these sectors have a very small number
of funds, eg: North Am Smaller Cos 8 OEIC's and 4 IT's; Euro smaller cos 12 OEIC's and 4 IT's.

On a side note, you could also argue that the IT called North Atlantic Smaller Companies doesn't actually belong in the North American Smaller Cos sector at all as it has 60% of it's portfolio in the UK and 6.5% in New Zealand! Also 22% of the fund is in private equity:
http://markets.ft.com/research/Markets/Tearsheets/Holdings-and-sectors-weighting?s=NAS:LSE

competitionscafe

darkpool wrote: »

You must admit a lot of ITs trade at a discount to NAV, surely they have to be better than UTs?

Not purely on that basis no. The discount may never narrow (eg Alliance Trust has been on a 15% discount fairly consistently for over 5 years) or may widen further.