How do you choose a good investment fund or trust?
If you are blessed with the rare gift of perfect timing, then diving into funds or investment trusts that are about to do very well – and then hopping back out near the top – will see you right.
Most of us aren’t in possession of such flair, or a foolproof system, however, and our behavioural flaws tempt us into chasing yesterday’s winners rather than tomorrow’s.
A wiser course of action can be to buy and hold a consistent performer, something that can deliver solid, market-beating returns in as many years as possible.
And if your fund manager can’t do that then you may as well just buy a tracker.
Choose the Tortoise not the Hare: A steady and consistent performer can beat trying to chase shoot the lights out winners each year – and the AIC has ranked 20 investment trusts
Spotting these consistent performers can be notoriously difficult without the benefit of hindsight – and it will always involve a good dollop of luck.
But if you do believe it’s possible for active investors to outperform (a matter of some debate I know) you can try to weight the odds in your favour by picking carefully – looking for good managers, with a clearly defined and explained strategy, and a robust track record.
To dig into the world of Steady Eddies, the Association of Investment Companies did some research into the most consistent top performers of the past decade.
It ranked trusts by discrete annual returns (what they delivered each calendar year) and compared each one against the average trust that year, to see how many years out of ten they outperformed. Where two trusts had the same score, lower volatility of returns was used to rank them.
So, for example, Montanaro UK Smaller Companies, beat the average in eight years out of ten and secured sixth spot in the table, as it had volatility of return of 20.9 per cent, whereas Electra Private Equity was in 17th spot, despite also chalking up eight years, as its volatility was 34.1 per cent.
The top three trusts in the list all beat the average nine times and delivered big returns. These were Lindsell Train, up 714.4 per cent, Finsbury Growth & Income, up 307.5 per cent, and F&C Global Smaller Companies, up 297.4 per cent.
|Rank||Company||AIC sector||No. of times above Overall Weighted Average||Volatility of Return||% Share price total return over 10 years to 30 April 2018|
|2||Finsbury Growth & Income||UK Equity Income||9||16.18||307.49|
|3||F&C Global Smaller Companies||Global||9||16.38||297.39|
|4||Invesco Perpetual UK Smaller||UK Smaller Companies||9||17.7||301.73|
|5||JPMorgan US Smaller Companies||North American Smaller Companies||9||19.84||350.44|
|6||Montanaro UK Smaller Companies||UK Smaller Companies||8||20.91||175.64|
|7||Mid Wynd International Inv Tr PLC||Global||8||20.94||243.04|
|8||Dunedin Smaller Companies||UK Smaller Companies||8||21.83||233.66|
|9||TR Property||Property Securities||8||21.99||220.27|
|10||Herald||Sector Specialist: Small Media, Comms & IT Cos||8||22.04||331.58|
|11||Edinburgh Dragon||Asia Pacific – Excluding Japan||8||22.15||151.38|
|12||Schroder Oriental Income||Asia Pacific – Excluding Japan||8||24.02||220.34|
|13||Standard Life UK Smaller Companies||UK Smaller Companies||8||24.92||387.26|
|14||Polar Capital Technology||Sector Specialist: Tech Media & Telecomm||8||25.45||501.83|
|15||BlackRock Smaller Companies||UK Smaller Companies||8||26.37||409.79|
|16||Baillie Gifford Shin Nippon||Japanese Smaller Companies||8||27.15||645.42|
|17||Electra Private Equity||Private Equity||8||34.07||237.71|
|18||JPMorgan American||North America||7||12.75||254.67|
|19||Standard Life Equity Income||UK Equity Income||7||15.52||148.7|
|20||JPMorgan Elect Managed Growth||Global||7||16.17||151.34|
|Overall Weighted Average||133.63|
|Source: AIC using Morningstar data to 30/4/2018|
So what does this tell us?
Firstly, that it is possible to find a better than average performer over a reasonably long period, with even the trust in 20th spot beating the average seven years out of ten.
However, the difficulty is that rival research has also shown that you need to look over much longer terms to identify a real tendency to outperform. Ten years sounds like a lot, but similar investments or style can continue to do well over a decade and then fall out of favour.
It also delivers an interesting insight into how good managers can boost returns from lacklustre markets.
The trust that’s up 714%
One of these 20 trusts is an outlier.
The top ranked Lindsell Train trust is notable for two things, its spectacular return and that its shares consistently trade at a big premium to the sum of its parts.
That is currently 34 per cent, as we explain in our look at the Five trusts with the biggest premiums.
This is largely due to the fact that the trust itself owns a big stake of the Lindsell Train investment management company run by Michael Lindsell and Nick Train – investors suspect this business would is worth considerably more than its current stated value if it were ever sold.
This is evidenced by its being the key driver to the trust’s long-term performance, rising as a percentage of the net asset value from below 10 per cent a decade ago to 42 per cent today.
Seven out of the 20 trusts have a UK focus, the AIC said, which is impressive considering the UK stock market’s comparatively modest performance over the past decade.
What I also find interesting is that seven are smaller companies trusts, which might not be incontrovertible proof that skilled active managers are particularly worth backing in the less well-researched world of small caps, but gives an extra bit of heft to the theory.
So should you just buy the 20 trusts in this list and put your feet up?
Probably not. Just because something has done well in the past doesn’t mean future conditions will favour it.
You need to assess how you think things will play out, along with an investment’s value and quality. But weighing up where consistency comes from is food for thought.
One element identified by Peter Ewins, manager of third-placed F&C Global Smaller Companies, is avoiding companies with too much debt.
Another is to look only for those that qualify as ‘exceptional companies’, according to Nick Train, manager of second-placed Finsbury Growth & Income.
He said: We have found that if you own good companies for long enough then good things tend to happen for investors.
‘Luck must have played a part, for instance FGT has enjoyed takeovers over the year – Cadbury and more recently Dr Pepper and Fidessa. But perhaps good companies make their own luck?’
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