Are you better off with an investment trust or an open-ended fund? Most people seem to lean towards the former, although perhaps that’s the investing company I keep, but convincing data is very hard to find.
For example, preliminary research by the Cass Business School back in 2018 seemed to provide some evidence that investment trusts produced better returns.
But, as reported in the latest Investment Trust Handbook, the final version of the study was abandoned due to “data issues”.
Outnumbered but not outgunned
Part of the problem, it was claimed, is that there are relatively few investment trusts relative to other types of fund.
Here are some figures I got from Trustnet database that illustrate this:
| Type of fund | Number |
|---|---|
| Investment trusts | 301 |
| Open-ended funds | 3,668 |
| Pension funds | 8,465 |
| Life funds | 4,856 |
| Offshore funds | 4,423 |
| Exchange-traded funds | 3,449 |
There are an astonishing 82 other funds for every investment trust.
In practice, it’s probably a little less, as some pension and life funds are merely repackaged (and more expensive) versions of standard open-ended funds. But the difference in numbers is still vast.
In total, we are looking at over 25,000 different types of investment vehicle available to UK investors.
By way of contrast, there are only around 1,900 companies listed on the London Stock Exchange and that’s including all international listings and AIM companies.
Even the FTSE Global Total Cap index, which covers 48 countries and over 16,000 stocks ranging from tiddly micro caps to giants like Apple and Microsoft, offers less choice.
The relative scarcity of investment trusts is a large part of their appeal for me. There’s sufficient choice across a number of different styles, but not so much that you get bogged down.
You’ve got to be in it to win it
The line-up of available trusts and funds chops and changes a lot over the years, making getting a complete set of performance data a very tricky task.
An investment trust could get wound up, taken over, taken private, or rolled into other funds.
Turn the clock back ten years and there were 308 mainstream investment trusts according to the AIC. Today, Trustnet lists just 190 with a 10-year track record.
So, that’s 38% of investment trusts that are effectively missing when you’re looking at decade-long performance tables.
Open-ended funds see a little less activity. The Investment Association reckons there were 2,418 of them a decade ago while Trustnet lists 1,872 with a 10-year record.
Still, that’s around 23% that fell by the wayside for whatever reason.
However, it’s not surprising that there’s a higher turnover among investment trusts.
Open-ended funds don’t fall to large discounts to their net asset value so they aren’t vulnerable to takeovers or wind-up votes.
And many open-ended funds are sold to captive audiences and therefore can limp on for years without most of their investors even being aware that they are seriously underperforming.
Comparing trusts and funds
Another complication is that funds vary significantly in size from less than a million to tens of billions. This means there can be a big difference between looking at fund numbers and the weight of money invested.
Despite all these issues, I thought I’d some simple number-crunching with Trustnet’s performance data to see what dropped out.
Initially, I compared all trusts and funds with a 10-year record. But then I realised that the mix of assets they invest in are quite different.
About half of open-ended funds are classed by Trustnet as either Mixed Asset or Fixed Income, whereas only about a quarter of investment trusts reside in these categories.
About 10% of investment trusts invest solely in property assets whereas just 2% of open-ended funds do so.
Sticking to equities
To compensate, I looked at equity trusts and funds to avoid mixing up asset types too much.
Here’s what I found:
| 10-year return | Equity investment trusts | % in this band | Equity open-ended funds | % in this band |
|---|---|---|---|---|
| 400%+ | 20 | 13% | 22 | 2% |
| 300%-399% | 13 | 8% | 65 | 6% |
| 250%-299% | 16 | 10% | 64 | 6% |
| 200%-249% | 23 | 15% | 122 | 11% |
| 150%-199% | 35 | 22% | 201 | 19% |
| 100%-149% | 24 | 15% | 391 | 37% |
| 0%-99% | 23 | 15% | 198 | 19% |
| <0% | 2 | 1% | 5 | 0% |
| Total | 156 | 1,068 |
The MSCI All Countries World Index (covering both developed and emerging markets) has returned 208% over the last decade. So, 200% is roughly what a global index tracker should have produced.
46% of surviving investment trusts beat this bogey while just 25% of open-ended funds did so. I’m not surprised trusts came out ahead but I am surprised the difference is that large.
Part of this may reflect the more specialised nature of investment trusts — a higher proportion of them invest in areas like smaller companies, high-growth sectors, and illiquid assets. These areas often have higher growth rates than the wider market.
In the past, open-ended funds were typically more expensive but I think that’s less of a factor these days. Since the reforms introduced in 2013 (the Retail Distribution Review), the gap seems to have narrowed considerably.
Domestic bias
Of course, both trusts and open-ended funds also tend to be weighted much more towards the UK market than the 5% or so position you get with a global tracker.
Open-ended funds seem to be favour the UK more. In terms of assets managed, UK-focused sectors are about two-thirds larger than global sectors for open-ended funds, whereas the reverse seems to be true for investment trusts.
UK markets lagged global markets significantly over the past decade (returning about 100%) so that may explain part of the large gap in performance between open-ended funds and investment trusts.
Only 16% of surviving trusts and 19% of surviving funds fared worse than the 100% UK markets produced.
Tweaking the results
It’s worth considering what effect the trusts and funds that didn’t survive the decade might have had.
We could take the harshest assumption that the ‘missing’ 38% of trusts and 23% of funds all failed to beat world markets while they were in existence.
That would leave us with 29% of trusts and 19% of funds beating the global index.
These figures sound a bit high compared to official studies on performance data. They typically reckon 10-15% of trusts and funds beat stock market indices over this sort of timeframe.
Can we draw any conclusions?
I’d chalk this up as a minor anecdotal win for investment trusts, but no more than that.
This was a very crude exercise — I’m only using free data resources and making some subjective adjustments — and I’m obviously biased towards investment trusts.
What’s more, given it’s been a good decade for stock markets, investment trusts have had two extra tailwinds we should consider.
The typical trust carries a little borrowing, usually a high single-digit percentage, whereas funds have a little cash to cope with redemptions. Rising markets tend to favour geared portfolios.
And of course, discounts to net asset value have been narrowing over the past decade, giving the share prices of investment trusts a boost relative to their open-ended cousins.
Disclaimer
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.
Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!
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Jury still out then?
Thanks for the update re the CASS Study!
Seems it was a good decision not to hold my breath – see my comment from September 2019 to your earlier post “Do Investment Trusts Outperform Other Types Of Fund?”
I suspect the jury could be out permanently!
I reckon the strongest case is from those studies that look at ITs and funds managed by the same teams and compare their results. But there aren’t that many examples of those.
Crude analysis it is indeed to say the least! The methodology is just ludicrously wrong.
Thanks for the honest feedback, Bella.
Can you elaborate on what aspects of it are wrong?
Waiting to hear what Bella has to say, three weeks after her negative post