ii performance research: investment trusts vs funds

Our experts shares their analysis of the latest funds and trusts research from interactive investor.

New research by interactive investor looking at comparable investment trust and fund sectors, has found that investment trusts tend to be cheaper and outperform open-ended funds over the long term - but funds have a better track record over the past year.

When it comes to performance, although investment trusts are beating funds in eight out of 10 comparable sectors over the past 10 years to 31 May 2020, the reverse is true over the short term after some hefty market falls and uncertainty owing to the outbreak of Covid-19. 

Investment trusts are trailing funds in seven out of 10 comparable sectors over the past year, illustrating the double-edged sword that is investment trust gearing, because it can enhance losses in a falling market (as well as enhancing gains in a rising market). Over five years their performance is also less clear cut – it is a classic case of ‘six of one, and half a dozen of the other’.

When it comes to ongoing charges, the research suggests that investment trusts in comparable sectors tend to be cheaper than funds in seven out of 10 sectors. However, much of that will depend on what investors view as ‘cheap’ - with the lowest ongoing charge coming from the Global sector at 0.71%, it is easy to see why passive funds have started to account for the a significant proportion of private investor purchases. 

Even so, if you combine fund and investment trust purchases on the interactive investor platform in May, only two of the top 10 were passive – Vanguard LifeStrategy 80% Equity was in fourth place, and Vanguard LifeStrategy 60% Equity in eighth – while investment trusts accounted for 6 of the top 10.  

Moira O’Neill, Head of Personal Finance, interactive investor, says: “Lots has been said about the strong long-term performance of investment trusts, and we are big fans - that’s why we are one of the few investment platforms who are not shy of including them on our rated lists and model portfolios. 

“But investors need to understand that while some of their unique advantages can give them an extra turbo boost in the good times (like the ability to borrow to enhance returns), when times get tough, they can get a whole lot trickier for investment trust investors – in the short term. That again tends to come down to gearing, which can enhance losses on the way down. As long as you have time on your side, you can hopefully ride that out, and the gains may be all the stronger on the way back up. But investors need to be aware.”

The study compared the average ongoing charges, as well as one, five and ten-year performance data (to 31 May 2020) of investment trusts in comparable Association of Investment Companies and the Investment Association sectors. North America was omitted from the research as there is an insufficient number of investment trusts in the sector to make a useful comparison.

Dzmitry Lipski, Head of Fund Research, interactive investor, says: “Charges matter, because they erode your returns, and even small amounts can add up over the years. Despite the rise of passive funds, which will have dragged down average costs in the funds universe at least, investment trusts are still cheaper, although many continue to charge performance fees. Some investors don’t mind paying performance fees, as they think it aligns manager interests with those of shareholders. But not everyone agrees – so it is worth checking.

“But there’s plenty of jewels in the funds universe crown, so don’t look at funds and trusts in isolation – take both into account. And they can also be used together to plug gaps in their respective offerings – just like there are few investment trust passives, bond funds and US specialists, the funds sector is not as strong on alternative assets.

“Investors should also consider platform costs because they ultimately make investing in funds and investment trusts more expensive or cheaper – depending on who you choose to invest with.”

Annualised performance

Annualised performance