When the world’s going nuts, it’s worth remembering that there are some investment funds that have produced great returns for more than a century and they’re still going strong today.
I’m not sure what’s been more painful over the last several weeks, the performance of my portfolio or that of Tottenham Hotspur. It’s as if they have been trying to outdo each other in terms of direness.
At such times, I think there’s a lot to be said for going back to basics and keeping it simple. For example, it’s worth re-examining the superior long-term record of large investment trusts and the fact that many of them have soundly trashed the market over the last ten years. As for Spurs, they’ll have to sort themselves out.
Recently I did a piece on specialist investment trusts but here I’m going to look at funds with a wider focus. The two tables below lists the 12 largest general funds that invest globally and the 6 largest that stick to the UK. If you click on each trust’s name you will go its profile page on the Association of Investment Companies website where you can find out more about each fund.
Global Investment Trusts
UK Investment Trusts
History
Many of these funds are over a hundred years old, which explains their rather grand old-fashioned names. Foreign & Colonial is the most ancient, having been founded in 1868, while both Scottish Mortgage and Witan will join the century club next year.
The youngsters of the group are Temple Bar (1926), Monks (1929), Caledonia (1960), RIT Capital Partners (1988) and Perpetual Income & Growth (1996). Age is no guarantee of quality, as Lehman Brothers has just discovered, but it does stack the odds in your favour.
Size and fees
I’ve used a cut-off point of around £500m in assets for both lists. Above this level, the fees paid tend to benefit from economies of scale, as it doesn’t cost twice as much to run a £2bn fund compared to a £1bn one. There isn’t a direct correlation between size and fees however as many funds now include a performance-related element. Where applicable, I’ve included the performance-related cost.
We can see that the average annual fee for the global funds of 0.78% and UK funds of 0.58% compares well with the 0.4%-0.7% you’d expect to pay for an exchange traded fund or other index tracker. It’s also considerably lower than the 1.6%-1.7% you’d pay for a unit trust or OEIC, the most popular type of investment fund.
Discounts
As investment trusts are quoted companies in their own right, their share price often differs from the net asset value of their investments. Generally speaking if a fund has done well, its shares will be in demand and it will trade at a narrow discount or premium. Funds that have performed less satisfactorily, such as Alliance, tend to have larger than average discounts.
If you’re holding these funds for decades, the discount at which you buy shouldn’t make too much difference, although it may sway your opinion if you’re choosing between a couple of otherwise similar looking funds.
Pucker performance
Stock markets have had a poor decade but a mixture of these investment trusts would have held you in good stead, with the global funds doing especially well. Only 2 out of the 18 funds have underperformed the UK market.
You could argue that the figures are flattered slightly because we are looking at the 18 largest funds now, so we’re excluding funds like Scottish & American and Electric & General that might have made a similar list had we compiled it ten years ago. I highlighted ten large funds back in July 2001, all of which are included in the current list, and these produced an average gain of 98% over the last ten years.
Ideally I’d like to see how these funds have been performed over the last 20, 30, 40 and 50 years, which is much more representative of an investing lifetime, but sadly this data is hard to come by.
What about the next ten years?
As is often repeated, past performance is no guide to the future and I would be surprised if these funds outperformed the market by a similar margin over the next decade. Low fees, low turnover and the ability to borrow (normally between 0% and 25% so on the conservative side) all help to boost returns. But to continue to outperform, these funds also have to retain the best fund managers.
Interestingly, there are changes afoot at three of the worst performing funds. Neil Woodford, one the UK’s top investment professionals, is about to take the reins at the Edinburgh Investment Trust which should mean better times for its investors. Alliance Trust, which merged with its sister fund Second Alliance back in 2006, has a new manager in Katherine Garrett-Cox. Witan has a new CEO too. This fund changed to a multi-manager approach in 2004 but this doesn’t seem to have boosted its performance.
For new investors, I think a selection of 3 or 4 of these 18 funds is an excellent way to start putting money in the stock market. Foreign & Colonial and RIT Capital Partners were among my first purchases of investment funds and I still hold the latter. Most, if not all, of these trusts have regular investment plans where you can invest as little as £50 a month.
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