How and why investment trusts beat other funds

First, the raw numbers. The AIC looked at sister funds – examples where the same investment manager runs both an investment trust and an open-ended fund following similar mandates. Over the 12 months to the end of March, investment trusts outperformed their open-ended equivalents in 41 out of 50 examples studied; over three years, 36 out of 50 investment trusts won out; that fell to 25 funds out of 47 over five years; but rose back up to 27 out of 35 over ten years.

So, what’s going on there? Well, you would certainly expect investment trusts to have posted superior numbers on a one-year view. Stock markets worldwide performed very strongly over the 12 months to the end of March; investment trusts tend to do better than open-ended funds during rising markets because they are, uniquely, allowed to take on gearing – borrowing that boosts returns when the value of the portfolio is heading in the right direction.

Arguably, the five and ten-year figures are more telling. For one thing, investors who aren’t comfortable with taking a longer-term view should probably steer clear of most investment funds – of any type – because short-term volatility is always a distinct possibility. But also, these longer-term periods span different phases of the stock market cycle, including both strong years and more challenging times.

Indeed, the five years running up to March 2026 were particularly difficult, with markets repeatedly blown off course by events such as the impact of the Covid-19 pandemic, Russia’s invasion of Ukraine, the Trump trade tariffs and the US’s war with Iran. But it’s worth noting that a clear majority of investment trusts – even with the potential disadvantage that geared positions carried for much of this period – still came out on top.

Over ten years, the percentage of winning investment trusts rose from 53% to 77% according to the AIC’s analysis. This longer view – the sort of term over which many investors will be looking – also included a variety of problematic times for financial markets. But investment trusts had enough time to exploit some of their natural advantages.

Importantly, that edge goes beyond the issue of gearing, valuable though that is. The closed-ended structure of an investment trust, with a fixed pool of capital, enables managers to concentrate on stock picking, rather than having to worry about inflows and outflows of cash from investors. This also makes it easier to hold hard-to-sell investments, from private market companies to real assets such as property or infrastructure, which can help drive performance. Corporate governance can also play a part, with investment trusts’ independent boards of directors holding managers to account. 

One other factor is also worth considering. The investment platform Interactive Investor conducted some fascinating analysis of the AIC data, focusing on what’s in the portfolios of some of these pairs of funds. Often, it found, investment trusts have taken larger positions – as a percentage of the total portfolio – in their most favoured stocks. In the investment jargon, their portfolios are more concentrated.

That’s not always the case, Interactive points out, but it’s an interesting observation. For a long time in the investment industry, arguments have raged between supporters of passive and active investment. The former say investors will very often be better off in a low-cost fund that simply tracks the index up and down, rather than paying higher charges for a fund where the manager tries to beat the index. The latter believe the best active managers can deliver superior returns worth paying for.

What you’re typically getting with investment trusts, Interactive’s analysis suggests, is a more active approach. Managers are often taking high-conviction positions on the stocks they expect to do best. And if you’re paying for active management, that may well be what you want – rather than a fund characterised as active but with a portfolio that looks more like the index.

The bottom line? Well, the data doesn’t lie. Over multiple periods, investment trusts have once again been shown to outperform comparable open-ended funds. But the rest of the story is even more interesting – understanding why investment trusts tend to do better will help investors decide which funds might be most appropriate for them.