Investment companies are active funds – on occasion, a passive option will make more sense
Rupert Hargreaves Investment columnist
The City of London Investment Trust (LSE: CTY) is one of the most popular among British investors. It frequently tops the “most bought” lists published by the country’s low-cost online brokers, and its £2.3bn market capitalisation makes it the largest in the UK equity income sector. The trust’s size, liquidity, low cost ratio (0.57%) and 4.9% dividend yield are all commonly cited reasons to buy this investment company.
But is it worth it? Over the past five years, the trust has produced a total return of 33%. Vanguard’s FTSE 100 tracker, which charges 0.06%, has returned 32.3% on a total-return basis. Over ten years, the FTSE 100 tracker would have returned 75.7% compared with 72.7% for the City of London trust. Vanguard’s FTSE All Share Trust (with a 0.06% charge) would have returned 74.1%. A lot of investors buy City of London for its income credentials, but income isn’t everything, and that’s why I’ve presented these figures on a total return basis.
The FTSE All Share yields around 3.5% today, but its higher growth rate has compensated for the lower income. City of London also has an active team, and its fees, while low, do eat into returns. Investors are essentially paying 0.5% a year more for the trust. Strip this cost out, and it would have been the clear winner over the past decade.
Trackers charge ahead
City of London is just one example of a wider issue. Investment trusts do have advantages over their open-ended active fund peers, but many pure equity trusts cannot hold their own against cheaper trackers. Of the 19 trusts in the Association of Investment Companies’ (AIC) UK equity income sector, only seven have outperformed the FTSE All Share over the past decade. Finsbury Growth & Income Trust, once the high flyer in the sector, has returned less than 5% in five years, underperforming all passive benchmarks and losing money in real terms. (See story below.) The global investment-trust sector is particularly bad. The MSCI World index has returned 240% on a total return basis over the past decade. Of the 19 trusts with more than £200m in assets in the AIC global sector, only one, Scottish Mortgage, has outperformed thi
