Many seasoned City professionals will expound the virtues of closed-ended investment trusts over their open-ended investment company (OEIC) counterparts. Investment trusts highlight lower fees, increased diversification and significantly better investment returns over the longer term.
Investment trusts, also known as investment companies, allow investors to spread risk and to access opportunities that would be unavailable to private investors through a direct route. Like OIECS or unit trusts, investors benefit from economies of scale within the fund and, of course, the specialist expertise of the fund manager.
Unlike open-ended investments, investment trust managers do not have the pressure of having to maintain liquidity or of the potential pressure of selling if participating investors choose to withdraw their funds. This is especially relevant if panicked investors choose to sell in a rapidly deteriorating market. OIEC fund managers can be forced to sell their best, most liquid holdings in order to meet redemptions which could potentially further impact performance.
Closed-ended structures allow greater scope to invest in real assets that are essentially illiquid and demand a long-term commitment in order to exact the very best returns such as private equity, infrastructure and specialist commercial property. This process can bring greater diversification to the strategy resulting in better long-term returns and more varied sources of income.
Although some OIECs do invest in physical property, they are notorious for closing their doors on investors when there is increased selling pressure. This can effectively lock investors into a falling asset as the manager struggles to find liquidity in the underlying assets.
The long-term performance of investment trusts is significantly aided by the fact that the investment managers do not need to hold excessive cash balances or sell assets in order to accommodate redemptions unlike their OEIC counterparts.
Since the banking crisis, private equity has played an increasingly important role in corporate funding and consequently has shared significant benefits. Specialist investment trusts provide the means for private investors to participate in this area of investment. Due to the nature of these investments they are essentially unsuited to an OEIC structure.
Another advantage of investment trusts is the ability not only to diversify sources of income, but manage cash flows. Reserves can be made in good years in order to maintain income levels in more difficult periods. Investment trusts also have the option to borrow up to a certain percentage of the underlying portfolio. This can potentially amplify the returns if the environment is favourable and the opportunity appropriate.