Who wants to be a millionaire?

What do the UK’s Isa millionaires have in common? One answer is a liking for investment companies, new research reveals. Britons who have managed to build an individual savings account portfolio that is worth £1m or more are much more likely to hold significant sums in investment companies, analysis from the online platform Interactive Investor shows.

In all, Interactive Investor has more than 700 Isa millionaires on its books. The average such investor, the platform says, holds 54% of their money in investment companies – and only 7% in open-ended funds. That is a striking contrast to the rest of its client base, for whom investment companies account for an average of 29% of assets, only just ahead of their 26% allocation to open-ended funds.

The explanation for this contrast lies in separate research just published by Interactive Investor. Its analysis shows that looking at annualised returns, investment companies have outperformed open-ended funds in the majority of sectors over the last 10 and 20 years.

The average Global investment company, for example, has outperformed its fund equivalent by 0.95 percentage points a year over the last 10 years, and by 2.62 percentage points a year over the last 20 years. In the UK Equity Income sector, investment companies outperformed funds by an average of 1.79 percentage points a year over 10 years and 1.5 percentage points a year over 20 years.

Those seemingly small differentials have a huge impact over time: the average global investment company, for example, delivered a total return of 393% over 20 years to the end of January, compared to 202% from comparable open-ended funds. While investment companies have not pulled off the same trick in every sector – UK Smaller Companies is one stand-out exception – investors who have opted for these funds over their open-ended rivals have stood a pretty good chance of netting superior returns over longer-term periods.

This is why Isa millionaires so often turn out to have chunky allocations to investment companies in their portfolios. Even if you are taking advantage of your full Isa allowance each year – now £20,000 – it takes time to build up this kind of money; it would take 25 years to hit £1m if you began investing the full allowance each year today and earned an average annual return of 5%. But investment companies, at least in the past, have accelerated investors’ progress.

How so? Well, there are several explanations. One important driver of performance is investment companies’ ability to take on gearing, which boosts returns in the rising markets that have characterised much of the past two decades. Lower costs have often played a part too. Fund structure is another factor – investment company managers preside over stable pools of assets, with no need to worry about inflows and outflows of investors’ money.

In practice, there are a range of reasons why investment companies stand a good chance of outperforming over the longer term. But although many financial advisers have embraced the sector with new relish over the past decade, they remain in the minority. Only 10% of financial advisers regularly recommend investment companies to their clients, according to the AIC.

Hopefully, this figure will grow steadily. Investors themselves are increasingly attracted to the advantages of investment companies – and their choices are paying off, Interactive Investor’s analysis suggests. Investors relying on advisers to guide them through portfolio decisions may come to wonder why some are still so reliant on open-ended funds.