Investment trusts outperform funds in almost every major sector

The average global investment trust has outperformed its fund equivalent by almost 1% a year over the last decade, and by 2.62% per year over the last 20 years, new research has shown.

The UK Equity Income sector has seen investment trusts outperform funds by an average of 1.79% per year over the last 10 years, while investment trusts in the European Smaller Companies sector have outperformed funds by 3.7% a year over the same period.

Research from investment platform Interactive Investor showed that investment trusts make up 29% of the average ISA account compared to 26% for funds.

However, less than 10% of financial advisers recommend investment trusts regularly, according to the Association of Investment Companies (AIC), and funds still have a considerably higher profile.

Investment trusts are “closed-ended”, meaning that they have a fixed pool of capital and are easier to manage.

In contrast, when you invest in a fund, your money and other investors' money is pooled together and made up of a mix of investments. A fund manager then buys, holds and sells investments on your behalf.

Interactive Investor said that investment trusts should at least be considered when it comes to constructing a diversified portfolio.

However, it warned that managing to obtain a bargain, which can enhance returns, is no longer as easy as it once was, as discounts have narrowed considerably over time.

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“Even carving out an extra half a percent a year is impressive enough year on year, and many investment trust sectors have outperformed funds by considerably more, Dzmitry Lipski, head of funds research, Interactive Investor, said.

“But while thought provoking, these are just averages – like every other sector, the investment trust sector has its winners and losers. And sometimes, the bigger the rise, the bigger the potential fall.

“Investment trusts do have some structural features that help them outperform over the long term, such as the ability to gear to enhance returns, and a closed ended structure that means they can take a long-term view without having to sell stock to meet potential redemptions. But their ability to gear to enhance returns also means they can be considerably more volatile in falling markets.”

It comes as the coronavirus crisis saw global dividends fall to $1.26trn ($900bn) in 2020, down 12.2% on a headline basis.

Although an alarming fall, this was better than the best-case forecast of $1.2trn thanks to a less severe fall in Q4 payouts than anticipated, the latest Global Dividend Index from Janus Henderson showed.

On an underlying basis, dividends were 10.5% lower in 2020, a smaller decline than after the global financial crisis.

Janus Henderson’s index of global dividends fell to 172.4, a level last seen in 2017.

The dividend cuts were most severe in the UK and Europe, which together accounted for more than half the total reduction in payouts globally, mainly owing to the forced curtailment on banking dividends by regulators.

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