Investors are getting better returns from investment trusts compared with similar open-ended funds run by the same asset manager, research shows.
With high inflation and volatile financial markets, investors are often seeking the best places for their money and sometimes that means choosing between investment trusts and open-ended investment funds.
Sign up to Money Morning
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
How much did investment trusts outperform funds by?
The analysis shows that over the past ten years, the average investment trust with a sister fund returned an extra £31 per £100 invested.
In percentage terms, investment trusts outperformed their sister funds by an average 1.3 percentage points per year.
Over one year, the average investment trust returned an additional £5 per £100 invested and rising to £6 over three years.
Performance is more muted over five years, with an extra £3 per £100 invested, influenced by the widening of investment trust discounts over this period, the AIC said.
It comes as the average investment trust discount widened from 4% at the end of March 2021 to 14% at the end of March 2026.
Britton added: “Investment trusts won’t always outperform open-ended funds, especially in down markets when discounts tend to widen. But over a market cycle, investment trusts’ structural advantages support strong performance.
|
1 year |
3 years |
5 years |
10 years |
|
|
No. of sister pairs in which investment trust outperformed open-ended fund over the period |
41 out of 50 |
36 out of 50 |
25 out of 47 |
27 out of 35 |
|
% of sister pairs in which investment trust outperformed open-ended fund over the period |
82% |
72% |
53% |
77% |
|
Average investment trust outperformance (additional £ generated by investment trust per £100 invested in sister fund) |
£5 |
£6 |
£3 |
£31 |
|
Average investment trust outperformance (% p.a.) |
4.5% |
1.8% |
0.5% |
1.3% |
Are investment trusts better than open-ended funds?
Investment trusts and open-ended funds work in different ways.
In both cases, investors will need to consider fund and platform fees and underlying investments.
Nouran Moustafa, practice principal of Roxton Wealth, suggests the close-ended structure of investment trusts can be “incredibly powerful” for investors as the manager is not forced to sell assets to meet redemptions during periods of market stress. That can help prevent a run on an investment trust, which open-ended funds don’t benefit from.
Moustafa added: “This can give them more freedom to invest with conviction, use gearing, and hold less liquid assets where appropriate. That is often where outperformance can come from.
But she warns there are extra “moving parts.”
As investment trusts trade on the stock market, investors need to consider the share price and whether it is trading at a discount or premium to net assets value (NAV).
Gearing can also boost agains but make losses worse, while managers can limit dividends unlike funds that will just payout your returns.
Pricing on open-ended funds may be seen as more simple in comparison, plus you don’t have to pay stamp duty.
Graham Nicoll, financial planner at NCL Wealth Partners, said: “Performance-wise, trusts frequently outperform in specialist areas like UK small caps. In liquid global markets, open-ended funds may lead due to lower-cost passive options. Costs also vary by scale. Platform fees can sometimes make trusts cheaper for larger portfolios, while open-ended funds suit regular monthly savers.”
There is, of course, nothing stopping you from using both for exposure to different markets.
Moustafa added: “The key point is suitability. Investment trusts can be excellent for the right investor with the right time horizon and risk appetite, but they are not a shortcut to better returns.”