The debate between buying open-ended funds or investment trusts is a long-running one, often framed in binary terms of: Which of the two structures produces better investor returns? The question, however, has no easy answer.
A sector-by-sector comparison of average returns between Investment Association (IA) funds and their investment trust (IT) equivalents produces mixed results: investment trusts tend to pull ahead over longer timeframes but only in sectors where their structure can be fully exploited.
Open-ended funds expand and contract with investor flows, which can force managers to buy or sell underlying assets at inopportune times. Investment trusts, by contrast, are closed-ended, allowing managers to take a longer-term view and invest in less liquid areas without having to meet redemptions. They can also use gearing, which can enhance returns in rising markets but amplify losses in downturns.
However, trusts trade on the stock exchange, meaning shareholder returns can diverge from net asset value (NAV) due to discount or premium movements – an added layer of complexity not present in funds.
Investment trust sectors can have very few portfolios in the peer group. Below, we have looked at the six sectors with at least eight trusts that also have a comparable Investment Association peer group, as well as UK All Companies funds and trusts, which are included for reference despite only five trusts populating it.
Across the dataset, the clearest patterns emerge over longer timeframes.
Daniel Lockyer, senior fund manager at Hawksmoor, said: “It is better to focus on three-year and beyond numbers, given that should be the minimum time horizon for investors in most sectors”.
Short-term data, meanwhile, is too volatile to draw meaningful conclusions from, with recent returns shaped by sharp market swings. Over one year, differences between funds and trusts are often marginal or inconsistent across sectors. In several cases, such as UK All Companies, the gap is effectively negligible.
| Return of average fund vs trust over different timeframes | ||||
| 1yr | 3yr | 5yr | 10yr | |
| UK Equity Income | ||||
| Average fund | 25% | 37% | 51% | 94% |
| Average trust | 23% | 36% | 42% | 101% |
| UK All Companies | ||||
| Average fund | 22% | 31% | 33% | 90% |
| Average trust | 22% | 43% | 15% | 88% |
| UK Smaller Companies | ||||
| Average fund | 15% | 14% | -10% | 70% |
| Average trust | 17% | 25% | 11% | 103% |
| Global | ||||
| Average fund | 25% | 38% | 40% | 170% |
| Average trust | 22% | 41% | 22% | 156% |
| Global Emerging Markets | ||||
| Average fund | 45% | 50% | 29% | 128% |
| Average trust | 42% | 80% | 85% | 185% |
| Flexible Investment | ||||
| Average fund | 21% | 31% | 29% | 95% |
| Average trust | 16% | 26% | 22% | 73% |
| Infrastructure | ||||
| Average fund | 21% | 22% | 36% | 103% |
| Average trust | 14% | 17% | 10% | 60% |
In the UK Equity Income sector, investment trusts have a slight edge over 10 years, returning 101.2% compared with 93.6% for their open-ended peers.
The top strategy over this timeframe was Law Debenture, which returned 249,9% under FE fundinfo Alpha Manager James Henderson and co-manager Laura Foll; compared to the 174,2% of Man Income, which is run by Alpha Manager duo Henry Dixon and Jack Barrat.
Over shorter periods, however, the gap narrows or reverses, with funds marginally ahead over one, three and five years.
A similar picture can be seen in UK All Companies. Over one year, there is effectively no difference between the two structures, with funds returning 22.2% and trusts 22.1%. Over three years, trusts move ahead more decisively, delivering 43.1% compared with 31.2% for funds.
However, this advantage does not persist consistently: over five and 10 years, funds regain a slight lead. The best fund for 10-year returns was Artemis SmartGARP UK Equity (255.1%), managed by Alpha Manager Philip Wolstencroft; in the closed-ended space it was Fidelity Special Values (179.4%), run by Alpha Manager Alex Wright.
It is in less liquid parts of the market that the closed-ended structure appears to make the most difference. In UK Smaller Companies, investment trusts outperform across every measured timeframe, with a particularly wide gap over five and 10 years.
Trusts returned 10.7% over five years compared with a loss of 10.2% for funds, and 102.9% over 10 years versus 69.7%. The standout strategies here were Thesis Stonehage Fleming AIM for the open-ended space (154%) and Harwood Capital
Rockwood Strategic in the trust world (314.3%) – however the second-best trust here, JPMorgan UK Small Cap Growth & Income, returned half of that (158.6%).
It’s a similar story in global emerging markets: while funds are ahead over one year, trusts dominate over longer periods, returning 80.4% over three years and 84.8% over five years, compared with 50.2% and 29.1% respectively for funds. Over 10 years, the gap remains significant, with trusts returning 185.2% versus 128.2% for funds.
Lockyer said this is consistent with how the structure is intended to be used. “It should be the case that an investment trust uses the closed-ended structure to the full benefit by investing in illiquid assets such as smaller companies,” he said.
“Therefore the UK Smaller Companies sector makes sense that the trusts outperform the funds. The same goes for emerging markets.”
In more liquid, developed markets, the advantage is less clear-cut. In the global sectors, funds lead over one, five and 10 years, while trusts are ahead over three years.
The differences, while notable, are not as pronounced as in smaller companies or emerging markets, suggesting that the structural edge is less relevant when underlying assets are highly liquid.
Outside of pure equity sectors, the comparison becomes more difficult and Lockyer cautioned against drawing firm conclusions from these sectors.
“Other than the equity sectors, the others are not necessarily like for like,” he said, pointing to the differing compositions within flexible investments and infrastructure.
In the former, funds outperform across all measured timeframes, with a particularly strong lead over 10 years (95.2% versus 73.3%). However, this sector contains a wide mix of strategies, from capital growth funds to more defensive approaches, making like-for-like comparisons challenging.
A similar issue arises in infrastructure, where funds are ahead over all longer timeframes, returning 103.2% over 10 years compared with 59.8% for trusts. But the underlying exposures can differ materially.