When an investment trust can beat its Oeic sister

Standard Life Equity Income investment trust has the same manager as its open-ended version, a better yield and trades at a significant discount – so why shouldn’t investors switch out of one into the other?

Iain Scouller, analyst at Oriel Securities, has suggested that investors do exactly this, branding the 8% gap between the trust’s share price and net asset value an ‘anomaly’, and saying there is scope for a ‘substantial discount re-rating’.

The £105 million trust has a yield of 4.5%, and its shares advanced 9% in the six months to Thursday – although they were flat in the past year, as its net asset value dropped 2%.

By contrast, Standard Life UK Equity High Income , the £712 million open-ended fund also run by Karen Robertson, has a yield of 3.9% and returned 15% in the six months to last Friday. It climbed 8% in the year to last Friday.

In a note on Thursday, Scouller pointed out that there is ‘quite a high degree of commonality’ between the two investment vehicles, with eight out of the 10 largest investments in the trust also represented in open-ended fund’s top 10 holdings. The trust also has a lower total expense ratio of 1%, compared with 1.6% for the fund.

The difference in performance reflects the trust’s positioning favouring cyclical companies over ‘some of the more defensive stocks’, he added.

Others were more cautious as to the benefits of switching between the funds.

‘It’s not a free lunch, so you do need to go into these things with your eyes open,’ said Haig Bathgate, chief investment officer at Turcan Connell. ‘The investment trust is going to be a lot more volatile than the unit trust – it’s also going to be more pro-cyclical, so discounts widen when the market is falling.’

Nonetheless, he noted that Turcan Connell had in fact moved between the two Standard Life funds, although not in the past few weeks. ‘It makes sense,’ he added. ‘You get periods, when just because the market is going through a period of negative performance, discounts widen.’

Advisers should also take note of liquidity, he continued, because low trading volumes mean it is possible to move trusts’ share prices. ‘You’d be fine if you were going in with say 50 or 100 grand, but if you tried going in with two or three million, you just wouldn’t be able to do that,’ he said.