A familiar story

One concern often raised about investment companies is that they tend to underperform in more difficult times. They often carry gearing, which can exacerbate setbacks, and at times of stress their share prices may slip to wider discounts to the value of the underlying assets, deepening losses. So does this mean that the sheen has come off the investment companies sector’s performance during 2020, which has been a deeply challenging year for financial markets amid the Covid-19 crisis?

Not according to new data just published by Trustnet and FE Analytics. Its analysis of the long-term returns achieved by investment companies versus the performance of comparable open-ended funds tells a familiar story. The former come out ahead almost across the board.

Take the Technology & Telecommunications sector, home to top-performing funds such as Allianz Technology and Polar Capital Global Technology. The average investment company in the sector delivered a return of 538% over 10 years to the end of October – some 161 percentage points ahead of the typical open-ended fund investing in the same stocks.

Or consider Japan, where the performance of investment companies was even further ahead, with a 164 percentage point margin between their average return and what the typical open-ended fund has produced. The list goes on: in Europe, investment companies did 65 percentage points better, rising to 82 percentage points for European smaller companies. Global investment companies finished 30 percentage points ahead of their open-ended rivals.

Closer to home, investment companies have also been the better bet for exposure to UK equities over the past 10 years. Whether you look at large companies, small companies or income stocks, investment companies have come out on top.

Overall, the data produced by Trustnet and FE Analytics shows that investment companies outperformed open-ended funds in 11 out of 15 sectors analysed over 10 years to the end of October. The most notable exception was North America, where open-ended funds did finish well ahead; there, however, passive funds have come to dominate in recent times, given the efficiency of the market and the difficulty that active funds have in identifying outperformance opportunities – and there are no investment companies investing passively in US stocks.

These statistics, remember, have been produced towards the end of a year in which we have seen remarkable volatility on world markets. We are often told that investment companies carry extra risk and that investors chasing the superior returns they tend to offer are therefore in danger of being caught out. This does not appear to hold true. It is certainly the case that investment companies did fall sharply during the worst of the market setbacks in the Spring, with many funds slipping to outsized discounts. However, there has since been a recovery and the anxieties of earlier in the year seem to have had little impact on long-term performance.

Advisers and investors choosing equities over asset classes presumably do so on the basis that the historical record of long-term outperformance from the stock market outweighs concern about the possibility of short-term volatility. On this basis, given the respective records of open-ended funds and investment companies, it is difficult to see why the latter would not be the default option for investors in most equity markets.