Funds are underperforming compared to investment trusts; which is better for you?

We disclose the risks to take into account as well as how much more investment trusts are returning than funds

Research indicates that investment trusts offer investors higher returns than comparable open-ended funds managed by the same asset manager.

Investors are frequently looking for the best places to put their money due to high inflation and unstable financial markets, which occasionally requires them to decide between open-ended investment funds and investment trusts.

77% of investment trusts with the same manager have outperformed open-ended funds, according to research from the Association of Investment Companies (AIC).

BFIA problems nowadays. Investment trusts performed better than their sister funds over one, three, and five years in 82%, 72%, and 53% of cases, respectively.

"There are several reasons for this strong long-term performance," stated Nick Britton, the AIC's director of research. Because of their closed-ended structure, investment trusts allow their managers to buy and sell assets whenever they choose, independent of investor purchases or sales.

"They don't have to worry about having to sell them to cover redemptions when they invest in less liquid assets like smaller businesses or even private companies. Additionally, they can gear, which increases risk but can improve long-term returns. The "

To what extent did investment trusts perform better than funds?

According to the analysis, the average investment trust with a sister fund has returned an additional £31 for every £100 invested over the last ten years.

Investment trusts beat their sister funds by an average of 1.3 percentage points annually.

The average investment trust returned an extra five dollars for every hundred dollars invested over a one-year period, increasing to six dollars over a three-year period.

According to the AIC, performance has become more subdued over the past five years, with an additional 3 per 100 invested, due to the expansion of investment trust discounts during this time.

The average discount on investment trusts increased from 4% at the end of March 2021 to 14% at the end of March 2026.

Investment trusts won't always perform better than open-ended funds, particularly in down markets when discounts tend to widen, Britton continued. However, strong performance is supported by investment trusts' structural advantages over a market cycle.

Compared to open-ended funds, are investment trusts superior?

Open-ended funds operate differently from investment trusts.

Investors must take into account fund and platform fees as well as underlying investments in both scenarios.

The closed-ended structure of investment trusts, according to Nouran Moustafa, practice principal of Roxton Wealth, can be "incredibly powerful" for investors because the manager is not compelled to sell assets to cover redemptions during times of market stress. Open-ended funds do not benefit from this, but it can help prevent a run on an investment trust.

"This can give them more freedom to invest with conviction, use gearing, and hold less liquid assets where appropriate," Moustafa continued. This is frequently the source of outperformance.

However, she cautions that there are additional "moving parts." The "

Investors must take into account the share price and whether investment trusts are trading at a premium or discount to net assets value (NAV) when trading on the stock market.

In contrast to funds that only distribute your returns, managers have the ability to restrict dividends, while gearing can increase gains but exacerbate losses.

In addition to not requiring stamp duty, pricing on open-ended funds might be perceived as simpler in comparison.

Financial planner Graham Nicoll of NCL Wealth Partners stated: "Trusts often outperform in specialized areas like UK small caps in terms of performance. Open-ended funds may lead in liquid international markets because they offer less expensive passive options. Scale also affects costs. Trusts can occasionally be more affordable for larger portfolios due to platform fees, but open-ended funds are more suitable for regular monthly savers. The "

Naturally, nothing prevents you from utilizing both to gain exposure to various markets.

"Suitability is the key," Moustafa continued. Investment trusts are not a quick route to higher returns, but they can be great for the right investor with the right time horizon and risk tolerance. The "