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Actively managed investment companies vs composite benchmarks

The AIC’s Jemma Jackson examines research on the performance of investment companies’ performance, including charges and discounts, versus their benchmarks

When it comes to investment companies’ performance versus composite benchmarks, latest research from James Carthew, head of Research at Quoted Data, makes compelling reading. This research generally puts investment companies ahead of the composite benchmarks and is a vote of confidence for active management within the closed-ended investment company structure.

The research suggests that over 10 years:

• 61% of the Global investment company sector has beaten the MSCI World

• 95% of the UK Equity Income investment company has beaten the FTSE 350 High Yield Index

• 58% of the UK All Companies sector has beaten the FTSE All Share

• 77% of the UK Smaller Companies sector has beaten the FTSE Small Cap

• 100% of the Europe sector has beaten the MSCI Europe ex UK Index

• 3 out of 4 European Smaller Companies investment companies has beaten the MSCI Europe ex UK Smaller Companies index

• 62% of Asia Pacific Ex Japan beat the MSCI AC Asia ex Japan index.

• All three companies in the Sector Specialist: Biotechnology & Healthcare beat the MSCI World Healthcare Index.

Commenting on the research, James Carthew said: “There seems to be a clear pattern here. Investment companies do, on average, outperform, despite the fees they charge and despite their shifting premiums and discounts. Active management works and my faith in investment companies is undiminished.”

Speaking of fees, it is true that investment companies cover a broad spectrum. The large, retail focused companies tend to be very good value for money, but some more specialist sectors (and companies) have higher charges. This very much depends on the type of investments held so, companies actively managing direct property or investing in hedge funds, for example, could be expected to have higher charges than companies investing in mainstream equities eg. the UK All Companies sector. So research is important, and whilst charges are only one of many things to consider, they are certainly worth looking at.

In a post RDR world, we have seen an increasing number of investment companies removing performance fees, and this has been particularly the case amongst retail focussed investment companies. The investment company sector has seen around one performance fee abolished a month since January 2013 (29 companies have abolished performance fees) compared to 3 in 2012 and 3 in 2011). So there’s a clear trend, and we have also seen a number of companies making changes to their charging structures more generally in order to be more competitive in a post RDR world.

But back to performance: of course investment companies have a tendency to perform well during the good times, because they can ‘gear up’ (borrow) to boost returns, but can suffer more during times of volatility. If markets rise and performance is good, returns will be enhanced – the loan can be repaid, with a profit on top. But in falling markets, gearing will magnify losses. So whilst investment companies will tend to outperform over the long-term, investors may experience a bumpier ride along the way. However, the average investment company is currently 7% geared – relatively modest, although some sectors and companies are more highly geared than others, whilst some investment companies choose not to gear at all.

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