Advisers blamed for funds bias

Investment trusts “comfortably outperformed” open-ended funds in the decade to the end of 2009, according to an analysis of the sector.

Over the period, investment trusts outperformed their benchmarks in six of eight sectors studied by analysts at Collins Stewart – underperforming only in the Far East and Japan. Open-ended funds outperformed in just two of the same eight sectors: UK income and global growth.

The analysts blamed the influence of commission on financial advisers for the fact that open-ended funds have been more popular among private investors than closed-ended investment trusts.

Funds under management in the open-ended industry, which include unit trusts, grew 90 per cent to £481bn in the past decade. Investment trust assets grew just 2.5 per cent, to £80bn.

Financial advisers are able to receive a commission for selling open-ended funds but investment trusts – along with exchange-traded funds and other direct share investments – pay no commission. “We believe the ability to pay commissions to ‘independent’ advisers has been a key driver of growth [in
open-ended funds],” the analysts say.

Mick Gilligan, analyst at Killik & Co, says that the ability of investment trusts to borrow money – or “gear up” – could be one reason for their outperformance over the decade.

Gilligan also notes that investment trusts tend to come under greater scrutiny than open-ended funds. There are far fewer UK growth investment trusts than unit trusts, for example, making underperformance more noticeable in the closed-ended world.

“If someone’s not performing, there’s a greater chance corporate action will take place and there’ll be a tender offer or change of manager,” says Gilligan. “But in unit trusts, there’s a much bigger universe and sleepy underperforming funds can get hidden.”

However, unit trusts did perform better than investment trusts in the UK income sector. The total share price return on UK growth and income investment trusts was -3.5 per cent over the decade, against a 33 per cent rise on the average UK equity income fund.

Gilligan says this may have been skewed by “star” unit-trust managers such as Neil Woodford, Bill Mott and Tony Nutt.