The differences between open and closed-ended investment vehicles only becomes clear when the two ar...
The differences between open and closed-ended investment vehicles only becomes clear when the two are compared in performance terms, according to analysis conducted by Fund Strategies.
Investment Week's sister publication found, by comparing cumulative returns from the equivalent unit trust and investment trust sectors over one year to 21 October, all but one of the investment trust sectors underperformed its unit trust counterpart. Much of this is a result of the negative impact of gearing in a bear market.
In terms of performance, gearing provides the main differentiating factor between open and closed-ended funds, providing the latter with strong growth potential in a bull market and magnifying the risk on the downside.
That said, some unit trusts are now gearing up through bank borrowings. Subject to trustee approval and for a limited period, typically three months, open-ended funds can go up to 110% invested.
The recent underperformance of many investment trusts is understandable considering the average gearing level among them stood at around 20% at the end of September 2002.
However, over three years to 21 October, six out of 13 investment trust sectors outperformed unit trust equivalents and over five years it increases to eight out of 13.
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