1 reason why investment trusts could be better buys than the FTSE 100

In the long run, the FTSE 100 is expected to deliver a total return of around 7-8% per annum. This is relatively impressive and is higher than the returns of most other major asset categories. With tracker funds charging less than 0.5% and tracking the index relatively closely, gaining access to the index has never been easier for investors.

In the long run though, there may be a better alternative for investors who are seeking to obtain a high degree of diversification as well as a high return. Some investment trusts could be better buys than the UK's main index for this one key reason.

Superior performance

While not all fund managers are able to outperform their benchmarks or the wider index on a regular basis, there are some who can do so. Such managers have been able to generate a total return which is significantly higher than that of the FTSE 100 in the past. In some cases, they have been able to do so without taking substantially higher risks, which could mean that their risk/reward ratios are more favourable than that of the wider index.

Of course, investment trusts with strong track records, and which offer a manager that has been able to consistently demonstrate a high level of skill, may trade at a premium to their net asset value. Demand for their services may be high, but even in this scenario they may be able to beat the wider index in the long run.

Management focus

This ability to beat the market on a consistent basis is not something which all investors or fund managers possess. It could be due to a variety of factors, including strong bottom-up research, or making the right calls on the macro outlook. Either way, history shows that some individuals are able to deliver consistently high returns in excess of the FTSE 100. While their performance may fluctuate just as the index does, focusing on their ability as the key reason to buy a particular trust could be a shrewd move for long-term investors.

In this sense, picking an investment trust may not be all that dissimilar to buying shares in a company. While a number of aspects, such as valuation, diversity and many others, are important when selecting a company or trust to buy, ultimately their future performance is closely tied to the ability of management. If they are able to develop the right strategy given market conditions then the company/trust is likely to be successful. Therefore, it can pay to focus on management strength and ability when a company or a trust being researched.

Takeaway

While the FTSE 100 is an attractive investment for long-term investors, some investment trusts may prove to be superior opportunities. With the right manager at the helm, they can offer a higher level of return in the long run and may therefore be worthy of investment at the present time.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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