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Andrew Clare, Cass

Investment Trust managers outperform managers of unit trusts


New research from Cass Business School has made the first direct comparison between the performance of Investment Trusts and Unit Trusts – making the first ‘apples to apples’ comparison of their alpha generating record.

Using a large sample of UK-domiciled Unit Trusts and Investment Trusts, the Cass researchers found evidence to suggest that the alpha generated by Investment Trust managers was, on average, higher than the alpha generated by managers of equivalent Unit Trusts.
 
To come to this conclusion the Cass researchers, Professor Andrew Clare (pictured), and Dr Simon Hayley, took into account a whole range of issues that could otherwise have potentially distorted the picture, these included: the sectoral composition of the Investment Trust industry; the typical risk profile of Investment Trusts; use of leverage; share buybacks at a discount; and possible survivorship bias in the dataset.
 
Accounting for all of these factors, the Cass researchers still found that the performance difference between the funds managed within an Investment Trust and that of a comparable Unit Trust averaged around 0.8 per cent per annum over any one year.
 
Clare, one of the Cass researchers, says:  “We were quite surprised to find such a difference.  Our results suggest that the structure of an Investment Trust, where the manager does not have to contend with constant inflows and outflows, may have led to better or more efficient investment decisions.”
 
Hayley adds: “Comparing raw investment returns across these two sectors can be misleading, since there are many factors at work. However, even after correcting for these factors, Investment Trusts outperformed Unit Trusts over this period. We will continue to investigate the factors behind this difference in future research.”
 
Cass’ research was supported by a small practitioner group coordinated by Will Goodhart, chief executive at CFA UK, the UK’s leading professional body for the investment sector.
 
The research will be presented for the first time at the Future of Investment Trusts conference on 14 June at The Ned in London.

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