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Do Investment Trusts beat the Market?
7upfree
Posted: 22 March 2018 18:11:11(UTC)
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I have been looking to dip my toe into the market of investment trusts over the last few months. While there is plenty of data comparing active v passive, there is precious little comparing IT v passive.

By chance I managed to find a copy of the Investment Trust Yearbook for 1986 online. There is an intriguing table found on p.13 which compares "Investment Trust Indices" with "De Zoete Equity Indices". There is no specification as to how these indices were compiled. However, the basic conclusion is this: between 1946 and 1985, IT produced an indexed return (based at 100) of 4641; Equity returned 1307.

I have to say that I am quite surprised by the conclusion. Can anyone shed any light on the data sources? The 2018 yearbook does not continue these indices.

If it is correct, and the effect has endured, this would seem to make a relatively compelling case for ITs (accepting the limitation that the past does not always guide the future). Thought I would share in case it was of any passing interest.
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King Lodos
Posted: 22 March 2018 19:41:23(UTC)
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Markets used to be less efficient, so it used to be easier for smart money to beat dumb money – and investment trusts should generally expose you to more smart money.

I think they still tend to beat the market in most sectors (20 out of 33 global trusts beat the MSCI World over 10 years recently), but it's a slightly complex problem, as many trusts use gearing, so you should probably compare them to an index that goes over 100%.

Imagine if I start a fund, and it's just a FTSE World index geared at 200% .. Well it does something like double the market return, so I can skim a 3% fee off it, and charge 2.5% on the cost of borrowing – pay my team £millions, and spend all day drinking Martinis .. So benchmarks can be a murky science.
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7upfree
Posted: 22 March 2018 19:49:19(UTC)
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I agree that the world has changed a great deal since the table was compiled. However, the level of outperformance was pretty incredible which leads me to doubt the provenance of the figures. Of course, what you could get away with saying has changed a great deal in 30 years as well!

I have been on a journey of passive to active (via a hopeless financial advisor) back to passive. In truth, there is room for both. I like the idea of IT's over funds and might dip my toe in the water with a drip feed into a few of the larger global funds over time. I did think about buying a couple of fund of funds and drawing a line under matters, but the double layer of costs is pretty hard to stomach...
xcity
Posted: 22 March 2018 21:06:45(UTC)
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7upfree;59178 wrote:
By chance I managed to find a copy of the Investment Trust Yearbook for 1986 online. There is an intriguing table found on p.13 which compares "Investment Trust Indices" with "De Zoete Equity Indices". There is no specification as to how these indices were compiled. However, the basic conclusion is this: between 1946 and 1985, IT produced an indexed return (based at 100) of 4641; Equity returned 1307.

I have to say that I am quite surprised by the conclusion. Can anyone shed any light on the data sources? The 2018 yearbook does not continue these indices.

That takes me back!

de Zoete & Bevan were respected stockbrokers (previously de Zoete & Gorton) who were taken over by Barclays in 1986, together with Wedd (the jobber), to make Barclays de Zoete Wedd.
Their indices were widely used at the time. Methodology significantly criticised since for introducing positive bias by back testing/index creation.
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Alan Selwood
Posted: 22 March 2018 23:38:41(UTC)
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Ah yes! BZW, I remember it well.

The index has changed 'printed ownership' over the years, but regularly surfaces under the name of some firm or another. It's always been a fairly simple index comparison in its basic form, which was to show the relative performance of cash deposits, the gilt market and the UK equity market over a very long period, with or without reinvestment of interest/dividends, and with or without an adjustment for inflation.

I suspect that originally the equity index used was the Ordinary Share Index, and at some point I think it was transformed into the All-Share Index.

Any set of statistics will inevitably have a degree of survivorship built into it, since some markets vanished completely when the country foundered financially, and any small country will no longer be considered seriously as an index for comparison purposes.

Nonetheless, I am not at all surprised that a batch of surviving investment trusts should have wiped the floor with cash, gilts or a passive equity index.
With the passage of time, the tiniest consistent % gain will magnify the results beyond belief, just as an annual 3% management charge will eventually make a portfolio value become minute.

For those investors who wish to compare a passive index with a selection of funds or a selection of investment trusts, the evidence over the last 150 years (if it does not change in the future) suggests that closed-ended ITs (which can use gearing and don't have to sell assets at unfortunate times), generally beat open-ended, non-geared funds (which have to sell to meet redemptions); these 'real assets', in turn, in times when there is any inflation, however small, beat gilts and cash, which are not 'real' assets.

I doubt if this pattern will change unless we either revert to the Stone Age or equities become so much in demand relative to any other assets that demand prices them far, far beyond sensible value.
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King Lodos
Posted: 23 March 2018 05:15:04(UTC)
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7upfree;59183 wrote:
I agree that the world has changed a great deal since the table was compiled. However, the level of outperformance was pretty incredible which leads me to doubt the provenance of the figures. Of course, what you could get away with saying has changed a great deal in 30 years as well!

I have been on a journey of passive to active (via a hopeless financial advisor) back to passive. In truth, there is room for both. I like the idea of IT's over funds and might dip my toe in the water with a drip feed into a few of the larger global funds over time. I did think about buying a couple of fund of funds and drawing a line under matters, but the double layer of costs is pretty hard to stomach...


I'm fairly active/passive indifferent .. I do prefer a tracker where I can use one, because I like to feel like I own the assets – and a 50% fall makes me happy to buy .. Whereas an underperforming active fund presents a dilemma .. do you throw money at someone who's losing it to the market?

Active strategies also have a habit of going in and out of fashion, and decaying as more people follow them, or funds grow .. There were plenty of hedge fund managers making 20-30% annual returns in the 80s and 90s, who struggle today.

That level of outperformance you mention has been pretty common .. If I backtest 8 good, profitable stocks in a portfolio, from 1995 to today, you can get that similar 4x the market return .. Obviously hindsight makes that easy, but about 75% of stocks in an index are going to lose you money long-term – so you can do extremely well just avoiding them .. That's all Warren Buffett's done – he's let other people chase the next big thing, and trade mining stocks on big price moves, and just stuck with companies that make chewing gum or soft drinks, and are unlikely to go out of business .. That's real investing (as opposed to trading or stock picking), and to this day, not many people do it

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Mr Helpful
Posted: 23 March 2018 08:18:44(UTC)
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Another vote for some of each.

ITs are regarded as a means of delegating stock-picking to those with more time and information. The ITs used are chosen dependant on the philosophy of the managers and the look of the portfolio.
+ Are they in line with what I might do?
+ Does the portfolio fit requirements?
+ A nod to performance.
- But never selected on the basis of past performance alone.

"Do Investment Trusts beat the Market?"
Experience finds that sometimes they do, and sometimes they don't.
But holding ITs alongside similar trackers, is informational and allows for occasional rebalancing between the two, to some advantage.
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Julianw
Posted: 23 March 2018 09:44:08(UTC)
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Investment trust is just another wrapper.

Others are unit trust, Oiec, ETF etc. Some minor idiosyncrasies between the different wrappers.

Most investment trusts are actively managed, logical that all the arguments of active management versus passive index apply.


Rough rule of thumb: 80% of actively managed funds will under perform equivalent low cost index fund over the long term.

Whether you use active or passive, be fee aware. The higher the fee, the lower the probability of out performance for the investor in the fund (the manager always take their cut first)
Big boy
Posted: 23 March 2018 09:49:15(UTC)
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The price of Investment Trusts tend to outperform the NAVs during a "Bull" market and the converse during a "bear"
market. As discounts narrow and Investors confidence is high (just before Christmas) it is always a near perfect way of telling when a bull market is coming to an end. As we recall when the FTSE was 6000 discounts widened to their highest level for many years and this in turn was a massive "buy" signal. Understanding human behaviour tends to be a far better way of measuring markets than looking at data etc.... Investment Trusts are near perfect for reflecting human nature.

A successful Unit Trust Manager will always have floods of money coming into the Funds and this pumps up the prices and performance. As we have seen recently some of their stocks have come unstuck and this in turn means they have too sell as Unit holders sell. Investment Trusts tend not to be effected by pump and dump so much.

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7upfree
Posted: 23 March 2018 13:50:11(UTC)
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If we assume that we cannot compare active IT v passive, would a rational response be to hold a selection of the lowest cost ITs in a portfolio? That would afford the benefits of diversification (even just to comply with investor compensation limits in the event of an insolvency) but also to reflect that IT gearing and their different management culture may promote better results over the longer term. If we also assume that lower costs will increase the prospects of matching or beating the index, we seem to have the bases covered.

My difficulty is that I would prefer a single world wide tracker covering the UK. Save for ETFs, the choice is surprisingly limited (and even then, some of them have no EM exposure and the like). I am left having to rebalance amongst country index funds from time to time which I have not been diligent entierly about... Also, as some of the funds are outwith a tax free wrapper, rebalancing can have CGT implications.

I was thinking of dripping some money into the following global funds:-

Scottish Mortgage (0.44 OCF)
Bankers (0.44 OCF)
Scottish Investment Trust (0.47 OCF)
Independent Investment Trust (0.47 OCF)

I am also tempted to add Temple Bar (0.49) and City of London (0.42), and because he hasn't dissapointed me enough yet in his main fund (which is around 5% of the overall OEIC portfolio) a small amount into Woodford Patient Capital (0.18).

I have been generally hopeless at timing the market and accept some of the above are "expensive". However, I am looking at matters on a 10 - 20 year view.

I am also going to compile a separate category of star managers for a second portfolio.

To be honest, if I can match the market over the long term I will be content.

Any thoughts welcome.
Jim S
Posted: 23 March 2018 14:47:00(UTC)
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7upfree;59218 wrote:
If we assume that we cannot compare active IT v passive, would a rational response be to hold a selection of the lowest cost ITs in a portfolio? That would afford the benefits of diversification (even just to comply with investor compensation limits in the event of an insolvency) but also to reflect that IT gearing and their different management culture may promote better results over the longer term. If we also assume that lower costs will increase the prospects of matching or beating the index, we seem to have the bases covered.

My difficulty is that I would prefer a single world wide tracker covering the UK. Save for ETFs, the choice is surprisingly limited (and even then, some of them have no EM exposure and the like). I am left having to rebalance amongst country index funds from time to time which I have not been diligent entierly about... Also, as some of the funds are outwith a tax free wrapper, rebalancing can have CGT implications.

I was thinking of dripping some money into the following global funds:-

Scottish Mortgage (0.44 OCF)
Bankers (0.44 OCF)
Scottish Investment Trust (0.47 OCF)
Independent Investment Trust (0.47 OCF)

I am also tempted to add Temple Bar (0.49) and City of London (0.42), and because he hasn't dissapointed me enough yet in his main fund (which is around 5% of the overall OEIC portfolio) a small amount into Woodford Patient Capital (0.18).

I have been generally hopeless at timing the market and accept some of the above are "expensive". However, I am looking at matters on a 10 - 20 year view.

I am also going to compile a separate category of star managers for a second portfolio.

To be honest, if I can match the market over the long term I will be content.

Any thoughts welcome.


I think the best exposure to UK smaller companies at the moment is via Investment Trusts, because most investors have been very cautious on the UK due to Brexit risk, political uncertainty and Corbyn's prospects. So investment trust discounts for UK smaller caps are relatively high compared to other sectors (likewise China and Private Equity). I don't know much about UK Smaller Cos ITs though. I hold SVM UK Emerging and also hold Marlborough UK Microcap and Nanocap OEICs, which are both good.

We are all pretty hopeless at timing the market, whether we admit it to ourselves or not. Its a lottery. Best to focus on the long term rather than worry 'should I buy at 100 or wait until its down to 98'.
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7upfree
Posted: 24 March 2018 11:41:22(UTC)
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I have held a small proportion of my OEIC portfolio in Harry Nimmo's Standard Life Smaller Co Fund which has fared pretty well over the last few years. Malborough looks interesting as well. Most of my smaller company exposure is global via Vanguard Smaller Co Fund.
7upfree
Posted: 25 March 2018 12:57:47(UTC)
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I spent some time over the weekend looking at the performance of the 23 investment trusts described as "Global Growth " by City Wire (broadly coincides with the AIC category: "Global"). I compared the 23 funds with the MSCI World Index which appears to have been conceived in 1969. I looked back at the period from 1969 onwards (using Yahoo finance). Where a trust came into being after that period, I nevertheless recorded its performance as at Friday's close.

The average percentage increase of the 23 funds was 4175% over the period in question. MSCI All World was up around 1700% in the same period.

There is of course the issue of survivorship bias and the consequences of trust reclassification. I am also reliant on Yahoo Finance for the underlying data, which is not without issue. I am therefore inclined to treat the results with more than a little caution. The best performing fund was IITL at just under 11000%. The worst performing was MAJE at slightly over 800%. Only two funds under-performed the index in the period.

The performance of the funds is not at all consistent and very diverse. I am now more convinced than ever that a selection of diverse global investment trusts stands a reasonable change of at least matching my preferred investment benchmark. If it was cost effective to do so, I would be tempted to buy all 23 on an equal weights basis. However, the transaction costs for monthly investment would be significant. I may narrow it down to a figure between 5 and 10 based on differing management style and proceed on that basis. As ever, any comments welcome.
King Lodos
Posted: 25 March 2018 13:30:32(UTC)
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I'm just looking up the big ones on Yahoo (SMT, MYI, Witan, etc) and getting average share price increases around 2000 .. and can't find a good World benchmark, but find e.g. Witan underperforms the Dow Jones by a long way.

I also don't know if you can access total returns? I don't use Yahoo Finance much.

Could it be that your MSCI World benchmark isn't going back far enough? I'm not sure how long it's been calculated .. Either way, I'd suggest the Dow Jones or S&P 500 (if you can get enough data on it), because the US market has been 'efficient' for a long time, and it's only more recently markets like Asia have started to become efficient (which is measured crudely by the difference between active and passive returns).


A lot of hedge funds produced amazing returns through the 80s .. The Quantum Fund did something like 6,000% in 10 years .. Warren Buffett's returns were much higher early on.

What tends to happen is investing styles that work get copied, and the 'edge' gets arbitraged away .. Back in the early-80s, for example, trend followers could beat the market many times over just investing in things that were rising, and selling things that were falling .. But if everyone does that, they can't all beat the market, so the market changes .. So outperforming is never as simple as looking back 30 years and seeing what worked .. The game is always changing .. And in principle, you can't beat the market unless you ADD some information to the market, and that information has to be correct .. That's why it's difficult .. You being in the market, and winning, makes the game tougher .. Edge is always being arbitraged away
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7upfree
Posted: 25 March 2018 18:56:43(UTC)
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Yes, there is an absence of data for the MSCI index. I should have made clear that I was reduced to using a google image for the current state of play since 1969. Hardly satisfactory but it was as good as I could manage. As far as I know, I am comparing ex dividend figures for both MSCI and the Trusts. The MSCI index began life in in 1969 as far as I can tell (admittedly from Wikipedia).

The US Index is a good shout for the reasons you say. FRCL returned around 25% less than the S&P since 1993. I am not sure for the period before then.

In the end, no one knows anything. That's why I think buying all of the global funds might be an interesting investment idea.

King Lodos
Posted: 25 March 2018 19:20:57(UTC)
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I think you'd need total return figures for a decent comparison .. How trusts handle dividends, and where fees come from, is a huge part of it – and you'd need an MSCI world total return index too (in case you weren't using one).

Trustnet Charting does this, but you can't get data much further back than the mid-90s.

SMT for example, underperforms the FTSE 100 for most the period from '95 to today (it's only outperformed during the post-crisis rally).

I think if you buy all the global funds, all you're really getting is leverage and fees .. They're the only consistent things .. Otherwise you'll be in so many different investing styles, and regions, and sectors, it'll just be a messed up FTSE World index.

If the aim is outperformance, you really just want to own the best 6 stocks between all those funds







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7upfree
Posted: 25 March 2018 22:13:16(UTC)
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I don't disagree. I am going to dig a little deeper. TR info is thin on the ground for long periods of time. It's just that when you see all of the trusts from 1970 plotted on one graph, it's all just noise. Reversion to mean is the only discernible principle. Buying SMT or IIL today feels like buying Hansa in 2007. Managers seldom out perform consistently. Their moment in the sun seldom lasts. Investing when they are successful may see their out-performance come to an end. As Taleb has also observed, almost all of the growth in any index, can be accounted for in relatively few days over a long time. The only certainty is that you need to be in it to win it. If you want fire and forget diversity your choice is a world index fund. There are only really three available. Once you are at the investor compensation limit for each (and I am well beyond), there is precious little choice. The OEIC global fund universe is massive - buying a chunk of that is all but impossible. But with 24 funds, you do indeed get a noisy index of sorts. Perhaps in a quest for diversity, it is a price worth paying for. Maybe the same effect could be achieved by purchasing 5-6 funds of obviously contrasting funds. Or I could just be slightly less lazy and work with more ex UK trackers and UK trackers. But where is the fun in that! I go back to where I started from. There is anecdotal evidence that: before charges manager's can beat the market; ITs seem to have cost and performance advantages over OEICs; fund cost is a determinant of future success; buying today's best manager is seldom a profitable venture for future profits. So, either buy all of the available shares or pick the ones with the lowest costs.

SMT is a case in point. My previous IFA, despite all of his rotten advice, left my wife will a small legacy of shares in 2011 with a portfolio that rose by around 50% in the past 4 years. The portfolio has about a dozen OEICS. Some with dire performance, others average and others very good. I suspect we have done as well as whatever index it was supposed to match. If he was a conviction man, he may have put it all with Woodford or a few other stars that have not shone in recent years... It was the diversity which saved the portfolio not the IFA's genius.

I will post up the graph tomorrow if get a minute - it is just worth seeing. Now back to Hansa, there is no real story to buy apart from the discount. However...

All the best.
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King Lodos
Posted: 25 March 2018 22:40:30(UTC)
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Some of those studies, showing almost all market returns come from relatively few days, would also show that *those* days often follow or precede sharp down days.

So the idea you have to be in the market for those few days is made often, but might not be entirely accurate .. A lot of algorithmic traders actually try to avoid those big moves (up or down) because they tend to be clustered together, and the best returns are just the slow, boring marches upwards.


And manager performance is dependant on style .. Value and momentum are the main investing styles, and they can by cyclic .. Most great hedge fund managers had a great 10-20 year period, followed by an underperforming one .. But the Warren Buffetts (you could say the business-focused investors, rather than the stock pickers) have tended to do well, pretty consistently, for a long time .. And the key to that is just finding great businesses, then owning a handful of them .. Charlie Munger's portfolio is almost entirely two stocks – it's a very different approach
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7upfree on 26/03/2018(UTC)
Jon Snow
Posted: 25 March 2018 23:55:08(UTC)
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"Income Investor Alert"

I like the fact that ITs declare a dividend in advance so I can plug it into my income spreadsheet. With OEICs and ETFs you have no idea what you're going to get.
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7upfree
Posted: 26 March 2018 08:27:14(UTC)
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King Lodos;59414 wrote:
Some of those studies, showing almost all market returns come from relatively few days, would also show that *those* days often follow or precede sharp down days.

So the idea you have to be in the market for those few days is made often, but might not be entirely accurate .. A lot of algorithmic traders actually try to avoid those big moves (up or down) because they tend to be clustered together, and the best returns are just the slow, boring marches upwards.


And manager performance is dependant on style .. Value and momentum are the main investing styles, and they can by cyclic .. Most great hedge fund managers had a great 10-20 year period, followed by an underperforming one .. But the Warren Buffetts (you could say the business-focused investors, rather than the stock pickers) have tended to do well, pretty consistently, for a long time .. And the key to that is just finding great businesses, then owning a handful of them .. Charlie Munger's portfolio is almost entirely two stocks – it's a very different approach


Here is the link to the chart. The data for BTEM.L is incorrect but have left it in for the sake of completeness.

Chart

Re your helpful post above, the trouble is how do you buy the next Warren Buffett. Terry Smith and Nick Train appear to be brilliant managers. But will they continue to perform? It's a bit like what is said about marketing: 90% of is wasted; it's just that they can't tell you which 10% works.

PS: The S&P 500 closing price for 1st January 1969 was 103.93. By my reckoning, the comparable return is c. 2600% The chart only has comparable data from 1993 hence why it does not feature.
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