But he admits this can be “disruptive” for investment managers as it necessitates a constant rebalancing of the fund portfolio.
“Such rebalancing is relatively simple for a liquid portfolio of large-cap equities.
"However, as recent gating and suspensions on open-ended property funds have shown, rebalancing a portfolio comprised of less liquid assets presents its own challenges, with managers facing the difficult choice between disposing of properties to fund redemption requests, holding substantial cash balances or simply denying investors access to their cash.”
This was precisely the scenario managers of open-ended property funds found themselves in following the vote in June 2016.
“Listed investment companies – including investment trusts – provide daily liquidity at all times to their shareholders through a live price on the London Stock Exchange, in the same way as any listed share,” Mr di Miceli continues.
“This means investment managers can focus on long-term portfolio returns rather than the provision of short-term liquidity. Through this closed-ended structure investors have been able to obtain access to a wide range of investment asset classes, from student residential accommodation through to the debt funding of UK infrastructure assets.”
Outperformance
There is evidence investment trusts outperform their open-ended counterparts.
Ms Brodie-Smith refers to research by Canaccord Genuity, which has identified that out of the 51 investment trust and open-ended pairings with a relevant five-year record, 84 per cent of the investment trusts outperformed their open-ended counterparts over five years on an NAV basis.
James Burns, partner at Smith & Williamson, observes often some of the best ideas will have a greater presence in the investment trust portfolio than in the open-ended one as very few managers run their portfolios identically, “but they know they have slightly more freedom in the investment company structure because they don’t have to worry about redemptions and inflows”.
He acknowledges: “There’s a lot of research that shows over the longer term the investment company run by the same manager will tend to outperform the open-ended fund for those reasons. Gearing used sensibly can add value and that slightly less liquid portfolio with potentially better ideas can add a lot of value as well.”
Investors need to be aware investment trusts can expose them to a bit more volatility though and, of course, in some cases an investment trust might not always outperform its open-ended counterpart.
“Although investment companies generally have a stronger long-term performance record than open-ended funds they are more volatile than open-ended funds,” says Ms Brodie-Smith.
