Funds at a knocked-down price

The battle between investment trusts and OEICs is long standing, but when it comes to cost, one side comes out on top, writes Kyle Caldwell.

The vast majority of investment trusts are cheaper than their open-ended compatriots, with almost a third of investment companies charging investors less than 1% for their services.

This is according to research carried out at the back end of last year by broker Winterflood.

On average, investment trusts can be bought at a knock-down 25 basis points price compared to OEICs and with the sector boasting stronger performance – only Japanese focused trusts lagged OEICs – investors are seemingly getting more value for their money.

The findings raised further eyebrows among advisers as it revealed that, over the past decade, emerging market trusts outperformed open- ended equivalents by almost 7%, with the likes of global growth and UK equity income trusts also outshining their cousins.

“Although not representative of the whole of the universe when you compare the total expense ratio (TER) of the eight sectors for both open-ended funds and investment trusts the difference is greater than 25 basis points in favour of investment trusts along with the majority of trusts enjoying superior performance,” says Winterflood.

The average investment trust TER stands at 1.7%, according to the Association of Investment Companies (AIC), which compares favourably to OEICs, who have higher charges as investors have to stump up both an initial charge and annual payment.

Two- thirds of the trusts in the Global Growth & Income sector cost less than 1% a year.

So if advisers have the opportunity to buy a product with stronger long-term performance at a cheaper price, why are investment trusts being left on the shelf to gather dust? One reason is advisers are not paid trail commission for selling investment companies, so there is no incentive to push them.

However, this will not be an issue after the retail distribution review (RDR) is implemented in early 2013, banning commission.

Yet investment trusts still face a number of headwinds. The major sticking point is discounts.

The vast majority of investment trusts trade on a discount, which means the share price is worth less than the underlying investments held by the company.

Discounts are not only arduous to explain to the average man on the street but they can also put clients’ capital at risk.

For instance, Anthony Bolton’s Fidelity China Special Situations trust, issued a ‘C Share’ at the start of this year.

At the time of issue the trust was trading between an 8%-10% premium, but today has slipped to a 3% discount.