Investment trusts outperforming funds in major sectors over last two decades

Investment trusts have outperformed funds in almost every major sector on an annualised basis over the last 10 and 20 years, findings from interactive investor have revealed.

Research from the investment platform revealed that the average global investment trust has outperformed its fund equivalent by 0.95% a year over the last 10 years, and by 2.62% per year over the last 20 years.

interactive investor suggested that most of this trend will have been “performance driven”, but added that narrowing discounts have also played a role.

The findings showed that the UK Equity Income sector has seen investment trusts outperform funds by an average of 1.79% per year over 10 years, and by 1.5% per year over 20 years. Investment trusts in the European Smaller Companies sector have also outperformed funds by 3.7% a year over 10 years, and by 2.43% over 20 years.

The research revealed one exception in the UK Smaller companies sector, where on average funds have outperformed trusts on an annualised basis by 2.35% a year over 10 years, and by 0.58% a year over 20 years.

“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,” interactive investor head of funds research, Dzmitry Lipski, commented.

“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.”

While investment trust double digit discounts were once the “norm”, the investment platform added that today they are more of an “exception” – highlighting that they have narrowed considerably over the last 10 and 20 years.

Lipski continued: “Wide discounts mean you get more capital and income working for you to produce long-term returns, but for new investors buying today, that opportunity has vanished – at least for now. The early days of the pandemic last year did see investment trust discounts, on average, return to the high teens – but not for long.”

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