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The best and worst investment trusts for risk-adjusted returns over 10 years

10 November 2017

FE Trustnet considers several risk-adjusted return anomalies in the IT universe over the past 10 years highlighted by scatter graphs from FE Analytics.

By Jonathan Jones,

Reporter, FE Trustnet

Investors expecting their lower risk investment trusts to provide lower returns and higher risk strategies to offer higher returns could be in for a surprise.

While this phenomenon known as an ‘efficient frontier’ is traditionally what investors can expect – and was indeed the case in the Investment Association universe study on Thursday – the investment trust sector presents more of a mixed picture.

In the study below FE Trustnet considers the sectors of the investment trust universe excluding unfocused sectors such as IT Specialist, and those with fewer than three constituents. Trusts without a decade-long track record have also been excluded.

The scatter graph below shows returns on the y-axis versus annualised volatility on the x-axis over 10 years.

Risk-adjusted performance of IT sectors over 10yrs

 

Source: FE Analytics

While some of the more volatile trusts have produced strong returns, such as the IT Japan Equities, the IT UK Smaller Companies and IT European Smaller Companies sectors, some have struggled.

Indeed, the average trust in the IT Commodities & Natural Resources sector has lost 47.42 per cent over the past decade with volatility of 26.06 per cent.

While the commodities supercycle, which came to an end in 2014, is the main reason the sector struggled, it should be noted that investment trusts are often more volatile than their open-ended counterparts as both gearing and movements in the discount lead to more exaggerated swings in both directions.

In down markets, highly geared trusts can get stung very badly and often struggle to make their money back for some time.

In the extended period of quantitative easing and low interest rates that has taken place for much of the last decade, there have not been many down years and as such the graph above shows many sectors have made strong returns regardless of their level of volatility.

The best performing sector over 10 years is IT Biotechnology & Healthcare, which has returned 389.34 per cent with volatility of 16.95 per cent.


The three funds in the sector with an eligible track record – Worldwide Healthcare, The Biotech Growth Trust and International Biotechnology Trust – are all among the top performing trusts in the entire universe, as the below chart shows.

Risk-adjusted performance of ITs over 10yrs

 

Source: FE Analytics

The chart also shows that the correlation between higher volatility and higher returns (and vice versa) tends to fall apart at the trust-specific level.

It should also be noted that both Candover Investments in the IT Private Equity sector and Alpha Pyrenees in the IT Property Direct Europe sector have significantly higher volatility of 117.36 and 78.96 per cent respectively over the last decade and have therefore been left off of the chart.

However, while there have been some volatile funds that have failed to deliver excessive returns, there is a silver lining: some of the best performers in the universe have only experienced moderate volatility.

Looking towards the top of the chart, while it is unsurprising to see smaller companies funds near the top perhaps more notable is the level of outperformance of the top trusts relative to their peers.

Of particular note is the five FE Crown-rated Baillie Gifford Shin Nippon trust, run by Praveen Kumar since December 2015 and before him John MacDougall.

The £360m investment trust is focused on investing in Japanese smaller companies with a preference for growth through innovative business models, disrupting traditional Japanese practices or market opportunities, such as growth from overseas.

The trust, which has a low annual turnover of 9 per cent and an active share of 93 per cent, has returned 414.79 per cent over the last decade, 256.19 percentage points more than its closest peer – the Atlantis Japan Growth trust.

Staying with smaller companies, Standard Life UK Smaller Companies Trust also stands out as a top performer with lower volatility.

FE Alpha Manager Harry Nimmo uses Standard Life Investments’ proprietary system ‘Matrix’ as part of his investment process. The quant-based screening tool highlights high-quality businesses with a competitive advantage which should lead to consistent and sustainable earnings growth.

While the margin of outperformance is narrower than in the IT Japan Smaller Companies sector, interestingly it has been much less volatile than some of its peers.


Indeed, the four crown-rated trust has returned 392.23 per cent over the last decade while the second-best fund in the sector – BlackRock Smaller Companies IT – has returned 316.03 per cent.

However, it has experienced monthly volatility of 19.06 per cent – the second-lowest figure in the sector – while the BlackRock fund has been one of the more volatile (24.66 per cent).

Away from smaller companies, the other standout performer is the five crown-rated Lindsell Train IT run by FE Alpha Manager Nick Train.

The £165m trust has returned 457.97 per cent over the last decade beating the next-closest peer by 130.01 percentage points, as the below chart shows.

Performance of trusts vs sector over 10yrs

 

Source: FE Analytics

The trust has been extremely popular with investors over the last decade as the quality growth style employed by Train has been in vogue.

As such, the trust, which invests in a relatively small number of stocks and focuses on themes such as brands, customer loyalty and strong recurring revenues, has seen its shares climb to a 23.1 per cent premium to its net asset value.

While there have been some strong performers, there have also been some poor ones.

As previously mentioned, commodities trusts have struggled and as such all five eligible companies find themselves in the dreaded bottom right corner.

Also there is IT Global Equity Income constituent Blue Planet Investment Trust, which has lost 48 per cent over the last decade with volatility of 40.87 per cent.

For reference, the next most volatile trust in the sector has experienced 18.1 per cent volatility, while the second-worst performer has made a positive return of 86.71 per cent.

The trust has a natural bias to financials, an area that has failed to recover from the financial crisis in 2008 during which time it lost 64.26 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.