He adds: “When investors switch into a risk-off mode, managers of open ended funds are left having to grapple with outflows, which can mean having to trim positions in the more liquid positions.”
Gearing
Ms Cantrell highlights that while investment trusts may sometimes have less liquid holdings, the fact that investments trusts allow for gearing, also known as leverage can be beneficial for clients.
Investment trusts have the ability to borrow money which are often used to purchase shares or assets in a process known as gearing.
This can increase returns when markets are rising, but lead to reduced returns when a market falls.
Ms Cantrell says: “Due to the asset classes that are more often included in investment trusts, the underlying holdings may be less liquid and less frequently valued such as direct property and private equity."
“Equally, the investment trust structure allows for leverage, and capital can be often distributed to smooth out yields, which can be beneficial for clients’ income management,"she adds.
This point is also made by Mr Hollands.
He says: “Of course in a rising market, you’d also expect a closed-ended fund to perform slightly better, because of lower cash positions, the ability to use gearing to enhance returns and a narrowing of the discount if demand is high.
"It is a case of horses for courses.”
Ms Cantrell says open-ended funds have more of a skew towards direct equities and volatility should reflect this.
“Some open-ended structures can operate a swing pricing mechanism where any client who submits an order could get a price which reflects whether that fund had significant flows (positive or negative) on that given day,” explains Ms Cantrell.
She adds: “This should not necessarily be seen as price volatility, rather it is a way to ensure existing shareholders are not impacted by flows in or out of the fund.”
All in all, open-ended funds and closed-ends both can be equally volatile at other points.
