Investment companies outperform in 2015

Were financial advisers who recommended investment companies last year rewarded for their faith in the closed-ended sector? New research suggests they were – with both strong absolute performance and impressive returns relative to the broader market and open-ended funds.

The latest report from Winterflood Investment Trusts, published last week, looks specifically at the fourth quarter of last year, as well as the performance of the sector throughout 2015. In the final three months of the year, the FTSE Equity Investment Instruments Index rose 6.4 per cent against a 4 per cent increase from the FTSE All Share, Winterflood reports. That was the sixth quarter of outperformance in a row, despite volatile and changeable market conditions, and over last year as a whole, the investment company sector returned an average of 5.2 per cent, against 1 per cent from the FTSE All Share.

It's not an entirely fair comparison, of course, given the overseas exposure maintained by many funds. But the figures demonstrate how closed-ended funds offer an opportunity for enhanced portfolio returns for advisers and investors prepared to look beyond the UK. They also suggest investors in the sector are reaping the benefits of opting for an active management approach.

Nor is this a one-off. As Winterflood points out: “This was the third year of outperformance in the last four, with 2014 and 2012 also being good years for the sector.”

Last year’s strong figures partly reflected a tightening in the discounts at which investment company shares typically trade relative to the value of their underlying assets. At the end of December, the typical fund was trading on a discount of 4.6 per cent, down from 5.1 per cent at the end of September.

This is part of a broader trend. Looking back over 25 years, the sector has traded on an average discount of 9.8 per cent. Over the past 10 years, however, this average has come down to 7.6 per cent, reflecting the increasing determination of investment company boards to take positive action, with interventions such as discount control mechanisms and share buy-back programmes.

As for returns relative to other types of collective investment vehicle, Winterflood reports that investment companies outperformed their open-ended fund equivalents in 11 out of 17 sectors during 2015.

The outperformance was particularly marked in some sectors. For example, in the UK All Companies category, the average closed-ended fund returned 14 per cent, nine percentage points more than the average open-ended fund. In Japan, where investment companies returned almost 21 per cent last year, the gap was six percentage points.

The relative performance of investment companies over the long term also looks impressive. Over the past five years, investment companies are ahead of their open-ended equivalents in 15 out of 17 sectors. Over 10 years, investment companies come out top in 12 sectors (and are level-pegging in another one).

There are a broad range of reasons for this outperformance, including competitive charges, structural advantages, gearing facilities and governance arrangements. The bottom line is that the data suggests investment companies continue to offer a compelling story to collective fund investors and their advisers.