The recent fall from grace of "star" fund manager Neil Woodford came about in part because his Equity Income fund was too heavily invested in unlisted companies.
He also runs an investment trust, which experts said would have been a better place for him to hold this type of asset.
It's not uncommon for a fund manager to run several portfolios, typically doing so with both an open-ended fund and an investment trust. Which is a better place for your money?
Telegraph Money, with the help of Moira O’Neill of broker Interactive Investor, has laid out four things to bear in mind when deciding to go with a particular manager's fund or trust.
We have looked at the 10 largest managers running both types of investment vehicle. Where we have mentioned performance, this typically looks over five years on an annualised basis (how much it has made on average each year).
The first thing to consider is "gearing", which is when an investment trust borrows money in order to invest it.
With interest rates low, now is a good time to have higher gearing, as investment trusts do not need to make particularly high returns to pay off the interest on a loan.
When markets are rising and performance is good, gearing will enhance gains, although if markets fall it will increase losses too. Therefore, your comfort with an investment trust’s level of gearing will depend on how you view markets.
However, not all managers choose to use this option.
Ms O’Neill said managers who choose not to use this option are not making full use of the investment trust structure and therefore investors might as well put their money in the fund.
For example, Sebastian Lyon heads the Troy Trojan fund and Personal Assets investment trust. The latter is not geared and Iteractive Investor’s Dzmitry Lipski said as such he would buy the fund.
The second measure is whether the trust’s shares are trading at a discount or a premium relative to the net asset value (NAV), or the current value of the underlying portfolio if it were to sell all of its holdings.
Investment trusts are listed companies in their own right and quoted on the stock exchange, meaning they are also affected by market sentiment and supply and demand.
While you may be prepared to pay a premium for a particular manager, if you can get the same portfolio through a fund (which does not fluctuate in price in the same way) then this would be preferable.
Nick Train’s Finsbury Growth & Income trust is one such example. It trades on a slight premium and therefore the Lindsell Train UK Equity fund – run by the same manager – is Interactive Investors’ recommendation.
However, if you can pick up a manager's trust at a discount, this could make it more appealing than the fund.
This is the case with Sam Morse’s Fidelity European Values trust, which is on a 7.5pc discount, and Mark Barnett’s Edinburgh Investment (11pc discount). The managers also run the Fidelity European fund and Invesco Income fund respectively.
The final two areas are more straightforward. The first is performance. Investment trusts have had a spectacular run over the past decade, boosted by the double-whammy of narrowing discounts and gearing (or borrowing) to enhance returns.
However, Ms O’Neill said that investment trusts are no longer on the massive discounts that they once were.
And while past performance is no guarantee of future success, it can show if gearing has been used effectively. For instance, if an investment trust with gearing is only marginally ahead of its fund counterpart, it might be worth wondering if the extra risk is worth it.
On a performance basis, the JP Morgan Japan fund has beaten the JP Morgan Japanese investment trust over one, three and five years. The same is true of Nick Evans’ Polar Capital Global Tech fund and the trust alternative, Polar Capital Technology.
On the other hand, Austin Forey’s JP Morgan Emerging Markets trust has outperformed the JP Morgan Emerging Markets fund.
The last – but important factor – is cost. All funds and investment trusts charge investors and the lower the fees, the more is returned to the investor. If both portfolios are similarly run, choosing the cheapest is another way of deciding between the two.
With little to choose between Matthew Dobbs’ Schroder Asian Alpha Plus fund and Schroder Asia Pacific trust, the slightly lower charges on the former make it a better choice, said Mr Lipski.
Similarly, Alastair Mundy’s Investec UK Special Situations fund has a slightly lower fee than the Temple Bar investment trust.
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