Investment trusts focused on US, Asian and European equities tended to generate higher returns than their open-ended peers last year, analysis by Trustnet has found. 
Analysts at Winterflood Investment Trusts described 2020 as “a very good year for investment trusts” following their strongest relative return in 30 years. The FTSE Equity Investments Instruments index posted a 17.8 per cent total return last year, which was 27.6 percentage points ahead of the 9.8 per cent fall in the FTSE All Share.
Meanwhile, the investment trust index is up by 167 per cent over the past decade, compared with 72 per cent for the FTSE All Share, and has outperformed the wider market in seven of the past 10 years.
“The obvious question is, why has the sector done so well in recent years? There are several answers to this, in our opinion,” Winterflood said.
“The UK market has been hamstrung over the last decade by its large weighting to sectors such as banks and oil, while domestic plays have struggled, particularly since the EU referendum in 2016. In contrast, the investment companies sector has found itself increasingly exposed to global equities and growth areas such as technology and healthcare.
“In addition, the growing importance of specialist mandates such as infrastructure has meant that the sector’s beta to the market has fallen. We estimate that 38 per cent of the sector’s assets were not exposed to publicly traded equities. Finally, it is worth noting that while performance has been assisted by discounts narrowing over the last 10 years.”
While investment trusts performed strongly against the wider market in 2020, Trustnet has looked to see how returns in the Association of Investment Companies sectors compared with their counterpart peer groups in the Investment Association universe.
Source: FinXL
The area where trusts outpaced open-ended funds by the widest margin was Asia-Pacific equities. As the chart above shows, the average trust in the IT Asia Pacific sector made a total return of 42.64 per cent in 2020 – some 22.63 percentage points higher than the average for the IA Asia Pacific Excluding Japan sector.
Asian equities in general had a relatively strong year in 2020, largely down to the performance of China. Although the country was the first to lockdown because of coronavirus, it was also the first to open up its economy and witnessed a speedy recovery.
The best performing Asia-Pacific investment trust last year was Baillie Gifford Pacific Horizon, which made a 128.58 per cent total return. The trust has 37.3 per cent of its portfolio in Hong Kong and Chinese stocks.
Pacific Horizon was the second best-performing trust of 2020, beaten only by Baillie Gifford US Growth’s 133.45 per cent total return. Scottish Mortgage, another Baillie Gifford trust, was in third place with a 110.49 per cent gain.
This compares with a 60.36 per cent return from the best-performing open-ended fund in the IA Asia Pacific Excluding Japan sector: Baillie Gifford Pacific.
Performance of Pacific Horizon vs Baillie Gifford Pacific over 2020
Source: FE Analytics
The fact Baillie Gifford has the best two Asian equity strategies, which are both run with a similar approach, but such different levels of total return highlights some of the advantages that the closed-ended structure can have.
Winterflood’s analysts said: “There will be those cynics who will discount [Baillie Gifford’s] recent success as simply a reflection of the dominance of a growth investment style over value in the last 10 years.
“However, in our opinion, this is to overlook how Baillie Gifford has embraced the opportunity set provided by the listed closed-ended fund structure in taking longer-term investment decisions, deploying gearing and investing in unquoted companies. Notably, there are no unquoted companies in any of its open-ended mandates.”
As the table above shows, the average trust in the IT European Smaller Companies, IT Japan, IT Japanese Smaller Companies, IT Europe and IT North America sectors also outperformed the open-ended space by a decent margin.
UK equity income and all companies investment trusts also beat their counterparts in the Investment Association peer groups, but lagged behind when it came to UK smaller companies.
However, there were six areas from the 15 we compared in this research where the average investment trust didn’t outpace its open-ended rival.
Performance of sectors in 2020
Source: FE Analytics
As the chart above illustrates, the heaviest underperformance from trusts came from the IT North American Smaller Companies sector. The average member of this peer group made a 10.80 per cent total return in 2020, which was 12.80 percentage points behind the 23.61 per cent average for the IA North American Smaller Companies sector.
The highest return from this group of strategies came from the open-ended Premier Miton US Smaller Companies fund, which gained 66.97 per cent in 2020.
Of 21 funds and trusts focused on North American smaller companies, the top 11 are open-ended; JP Morgan US Smaller Companies was the highest-ranked trust, in 12th place with a 15.47 per cent total return.