The millionaire makers
Investment trusts could make you rich more quickly, reports David Prosser.
With just a few weeks remaining of the 2024-25 tax year, campaigns to persuade investors to use up their annual individual savings account (ISA) allowances are now in full swing. One staple piece of research at this time of year is a report on ISA millionaires – a look at how many people have managed to amass more than £1m in their accounts since the tax shelters were introduced in 1999. And the latest such report has a familiar message: ISA millionaires are significantly more likely to own investment trusts.
The data comes from interactive investor, the online investment platform, which now has just shy of 5,000 ISA millionaires on its books. On average, ISA millionaires hold 41% of their portfolios in investment trusts, and only 13% in open-ended funds. By contrast, across all the platform’s investors, the average holding is 34% in investment trusts versus 22% in open-ended funds.
There’s a simple explanation for this disparity. Investment trusts tend to outperform open-ended funds over longer periods. If you’ve had larger holdings of investment trusts, your portfolio will therefore have grown at a faster rate. It’s also the case that wealthier investors are often more sophisticated – or have access to good independent financial advice – so they’re more likely to end up in investment trusts.
New analysis from the Association of Investment Companies (AIC) underlines the performance point. Looking back over the past ten years, it reports, investment trusts have outperformed open-ended funds in 11 out of 15 sectors of the market.
The AIC also crunched the data over the past 30 years in ten sectors (those with enough funds to allow for meaningful analysis) to compare performance over 241 separate rolling ten-year periods. Here, it found that investment trusts had beaten open-ended funds in most of these periods in nine out of the ten sectors in the study.
“On average, ISA millionaires hold 41% of their portfolios in investment trusts.”
David Prosser
Now, as every investor is constantly reminded, past performance is no guide to the future. You should remember that as you make your choices for this year’s ISA allowance. However, some of the explanations for investment trusts’ consistent performance remain in place as we look ahead.
In particular, investment trusts are permitted to take on gearing – to borrow money to increase their investment exposure; open-ended funds cannot do so. The effect of gearing is to boost returns when markets are rising; it also acts as a drag on performance when asset prices fall, but if you’re investing for the long term, you presumably expect more good times than bad.
Other factors driving investment trusts’ strong performance include fund manager stability, the structure of funds, governance arrangements and competitive charges. There’s no guarantee any investment trust will outperform a comparable open-ended vehicle, but these advantages give it a fighting chance.
Not everyone is going to become an ISA millionaire – not everyone has enough spare cash to max out their ISA contributions, and not everyone is in a position to hold on to their investments for decades. Still, by using your ISA allowance smartly – in line with your appetite for risk and your investment objectives – you can increase your chances of netting outsized returns. There’s plenty of reason to think investment trusts have a big part to play.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
