The £17bn Global investment companies sector contains some of the oldest and best-known investment trusts in the UK.
Over time, the investment approaches of the funds in the sector have been transformed to make them more relevant. Institutional investors have been replaced by private investors, investing directly in portfolios managed by private client brokers and wealth managers. Performance has improved, discounts have narrowed and many of these funds are now expanding as they attract new investors.
Global to the core
On average, closed-ended funds such as investment companies tend to outperform open-ended ones, and this is true in the Global sector. Comparing the median total return performance for the investment companies Global sector to the IA Global sector average, over three years the investment companies returned 24.1% against 21.1% for the open-ended funds and over five years the figures were 49.1% compared with 40.2% (to 10 Jun ’16).
The figures quoted for investment companies are net asset value returns. The share price returns were even better (26.3% for three years and 51.6% for five years, reflecting the general narrowing of discounts over this time). There is a variety of reasons for this but chief among them is that it is easier for managers of investment companies to take a long-term view and they can hold slightly more illiquid investments, having a greater exposure to smaller companies, for example.
Additionally, managers of investment companies do not need to hold cash to fund unexpected redemptions; instead, they can gear the fund using bank debt or other forms of borrowing. Many of the global trusts have long-term borrowings. This has not always been helpful as being geared into a falling market is unnerving, but the structure allows managers to hang on for a recovery.
Rewarding the brave
With interest rates near all-time lows, boards are becoming braver about taking on long-term debt again.
Boards are also driving long-term outperformance. Having independent directors fighting your corner is a big advantage for closed- over open-ended funds. Boards are not afraid to sack underperforming managers and have been diligent in bringing down fees, encouraging changes in investment approaches and mandates to keep their funds relevant to investors. Poorly performing funds on wide discounts are targeted.