What are some of the biggest impediments stopping investors from choosing investment trusts? How do closed-ended vehicles perform against open-ended ones? And why do so many investment trusts have such strange names?
Those were some of the key questions addressed by Andrew Summers, head of fund research and collectives at Investec Wealth & Investment, in his presentation to young wealth managers at the first event staged by Sub35, which aims to raise awareness of investment trusts among the next generation of professional investors.

Complexity

Summers kicked off by exploring an investment trust’s many moving parts. Investors need to get comfortable not only with the fund manager, but also the concept of an independent board and discount control mechanisms. These are means by which an investment trust board can reduce the discount to net asset value (NAV) at which a trust’s shares trade. They include buying back shares or making a tender offer, enabling shareholders to exit at a set price, at a set time, usually close to NAV. A board can also choose to issue more shares if demand is high and the shares consistently trade at a premium.

Size

The investment trust universe is much smaller than the open-ended one. There are some 800 investment trusts worth a collective £200 billion and more than 40,000 open-ended funds valued at more than £1 trillion in the UK.
“A quarter of investment trusts are less than £200 million in size,” said Summers. “An eighth trade less than 100,000 shares a day.”
For those who are prepared to do their homework and understand the intricacies of investment trusts, however, the potential benefits are plentiful.

Performance

Academic research has shown that closed-ended funds outperform open-ended ones by almost 140 basis points per year.
Around 50 basis points of that outperformance is attributed to investment trusts being better suited to investing in smaller companies, which can be less liquid, but have been shown to outperform larger companies over time.
The fixed pool of capital also enables managers to take a long-term view – another factor that has undoubtedly contributed to outperformance, said Summers.

Illiquid assets

While both open- and closed-ended funds can own smaller companies, managers of small and mid caps often take punchier positions in the companies they like the most in their closed-ended vehicles. The structure means managers do not have to worry about redemptions or subscriptions inflating or diluting their positions. Instead, they can build a position and hold it for the long term.
While many investment trusts have sister open-ended funds, a small proportion of investment trusts – around 10%, Summers estimated – invest in assets that tend to only be held in closed-ended vehicles. Infrastructure and private equity are good examples. These asset classes are becoming increasingly popular as investment managers seek exposure to real assets and other investments that are typically uncorrelated to traditional equity and bond markets.