“This is because when markets are poor, sentiment affects investment company share prices and discounts usually widen. Gearing will also be a drag on performance in poor markets.”
She notes, however, the closed-ended structure allows investment companies to “bounce back” fairly quickly from market volatility.
“Investment company managers can take a long-term view of their portfolio and do not have to worry about meeting redemptions by selling stock which is a concern for open-ended fund managers,” she continues.
“Similarly when times are good, investment company managers do not have to worry about inflows into the fund, whereas open-ended managers will need to manage and invest these.”
No right or wrong
Essentially, says Mr Burns, advisers and their clients need to do their research, making sure if they are comfortable with the investment manager, and with the differences in the investment company structure, notably the gearing and the discount mechanisms.
As FundCalibre investment trust specialist Tony Yousefian notes: “Whether you invest in an investment trust or an equivalent open-ended fund from the same manager really comes down to personal preference and there is no right or wrong answer.
“An investment trust can use a revenue reserve to provide a more stable and sustainable dividend, but not all investors want this.
“An investment trust can use gearing, which can obviously boost returns but can also lose more money too. Therefore high gearing can increase risk."
He adds: "An investment trust can trade at a premium or discount so while you may be able to pick up shares at a bargain discount, you could also be penalised by a discount if you need to sell your shares at a certain point."
Therefore, weighing up the pros and cons of each structure before choosing which product to invest in is crucial.
eleanor.duncan@ft.com
