Trusts outperform funds over 10 and 20 years, research suggests

On average, trusts have outperformed funds in most major sectors on an annualised basis over 10 and 20 years.

• The average global investment trust has outperformed its fund equivalent by almost one percent (0.95%) a year over the last 10 years, and by 2.62% per year over the last 20 years.
• The UK Equity Income sector has seen investment trusts outperform funds by an average of 1.79% per year over 10 years and 1.5% per year over 20 years.
• Investment trusts in the European Smaller Companies sector have outperformed funds by 3.7% a year over 10 years and 2.43% over 20 years.
• UK Smaller companies sector an exception – on average funds have outperformed trusts on an annualised basis by 2.35% a year over 10 years and 0.58% a year over 20 years.

As the clock starts to tick louder on the ISA deadline, research from interactive investor, the UK’s second-largest DIY investment platform, suggests that on average, investment trusts have outperformed funds in almost every major sector on an annualised basis over 10 and 20 years.

But with discounts having narrowed considerably over the last two decades, interactive investor cautions that bagging a bargain (which can enhance returns) is no longer as easy as it once was.

While it is important to raise a curious eyebrow at any form of statistical comparisons, the data is thought-provoking and suggests that investment trusts should at least be considered when it comes to constructing a diversified portfolio.

interactive investor customers tend to be fans of investment trusts, which make up 29% of the average ISA account compared to 26% for funds. But less than 10% of financial advisers recommend investment trusts regularly, according to the Association of Investment Companies (AIC), and funds still have a considerably higher profile,

The ii research suggests that on average, the average global investment trust has outperformed the average global fund by almost one percent (0.95%) a year over the last 10 years, and by a massive 2.62% per year over the last 20 years. 

In fact, investment trusts had, on average, outperformed their equivalent fund sectors over 10 and 20 years on an annualised basis in almost every single sector that interactive investor looked at.

The UK Equity Income sector, another retail favourite, has seen trusts outperform funds by 1.79% per year over 10 years and 1.5% per year over 20 years. Investment trusts in the European Smaller Companies sector have outperformed funds by 3% a year over 10 years and 2.43% over 20 years.

Most of this will have been performance driven; but narrowing discounts will also have played a role. While once upon a time investment trust double digit discounts were the norm, today they are more of an exception and bagging an investment trust bargain is easier said than done.

The UK Smaller Companies sector is a rare exception to the research findings – funds have outperformed trusts on an annualised basis by 2.35% a year over 10 years and 0.58% a year over 20 years.

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “Even carving out an extra half a percent a year is impressive enough year on year, and many investment trust sectors have outperformed funds by considerably more. But while thought provoking, these are just averages – like every other sector, the investment trust sector has its winners and losers. And sometimes, the bigger the rise, the bigger the potential fall.

“Investment trusts do have some structural features that help them outperform over the long term, such as the ability to gear to enhance returns, and a closed ended structure that means they can take a long-term view without having to sell stock to meet potential redemptions. But their ability to gear to enhance returns also means they can be considerably more volatile in falling markets.

“Another important consideration is investment trust discounts, which have narrowed considerably over the last ten and twenty years. Wide discounts mean you get more capital and income working for you to produce long term returns, but for new investors buying today, that opportunity has vanished – at least for now. The early days of the pandemic last year did see investment trust discounts, on average, return to the high teens – but not for long.”

Sector comparisons – investment trusts (AIC) versus funds (IA)

Source: interactive investor using Morningstar as at 31 January 2021. Total (NAV) Returns for IA (Investment Association) sectors and market (price) returns for AIC (Association of Investment Companies) sectors. Past performance is no guide to the future. The value of your investments and the income form them can go down as well as up and you may not get back the full amount invested. Investment trust figures are share price total return. AIC averages are for investment trusts, IA averages are for funds.

Notes to editors

The figures are from Morningstar to the end of January 2021 and are total return to the end of January 2021.

Open-end fund performance is total returns based on NAVs and the investment trust data is share price total return.