Investment funds perform better in times of economic downturn, but trusts are better for the long term, according to research from wealth platform Interactive Investor.
The investment platform compared the return of trusts and funds over 20, 10 and five years, as well as year-to-date.
According to its research, while there are specific sector variations, the “headline data is that investment trusts tend to outperform significantly over the very long-term, and underperform during periods of clear volatility.”
For example, the AIC Global investment trust sector is down 23% compared to the IA Global funds sectors, which is only down 15%.
Over 20 years, however, the AIC Global investment trust sector returned on average 440%, compared to the IA Global sector, which returned 329% over the same period.
The reason for this, according to ii, is “primarily due to the fact that investment trusts can borrow to enhance returns.”
“This is great in a rising market, but a drag when the markets fall.”
“It’s interesting to compare performance, but investors need to be aware that the investment trust industry is smaller than the funds industry – so has fewer competitors in the field,” said Dzmitry Lipski, head of funds research at ii.
“Even so, it’s very clear that over the very long term and during volatile periods, there can be some clear differences in the way each behaves.”
“This data illustrates loud and clear that investors should keep an open mind, and they don’t have to choose between funds and trusts – you can have a mix of both.”
FAQs
Yes. Investment trusts have potentially higher dividend yields, partly because of their ability to use leverage and the income-focused strategies often employed by fund managers. ETFs can pay dividends, too, but their yields derive from their underlying assets.
Which is better trust fund or mutual fund? ›
Unlike mutual funds, investment trusts can take on gearing, or borrowing additional money for investments, which unit trusts are not allowed to do. That means they can take bigger risks, meaning potentially bigger rewards or potentially bigger losses.
Do investment trusts beat the market? ›
"Do Investment Trusts beat the Market?" Experience finds that sometimes they do, and sometimes they don't. But holding ITs alongside similar trackers, is informational and allows for occasional rebalancing between the two, to some advantage.
Why are investment trusts out of Favour? ›
Liquidity was also highlighted as a key issue by respondents, as a lack of liquidity in trust shares in the secondary market has proven a major constraint to many investors. A total of 68 per cent said liquidity for trusts is worsening, up from 41 per cent in 2023 and just 21 per cent in 2022.
What is the difference between funds and investment trusts? ›
A main difference between investment trusts and other funds, such as unit trusts and OEICs, is that they're closed-ended, in that there's a limited number of shares in existence. When investors want to buy into a unit trust or OEIC, the manager makes it possible by creating new units and then invests this new money.
Are investment trusts riskier than funds? ›
Like all funds, investment trusts can rise and fall in value. However, they have more factors affecting their performance (such as supply and demand), which can mean they are more volatile and, therefore, a more risky investment.
What is the best trust to put money in? ›
Using an irrevocable trust allows you to minimize estate tax, protect assets from creditors and provide for family members who are under 18 years old, financially dependent, or who may have special needs.
Are trust funds good or bad? ›
The benefits of a Trust Fund are numerous, but perhaps the biggest perk is the control it provides over the management of your assets. Trust Funds can guarantee that your assets are properly taken care of until your beneficiaries come of age, while also allowing them to avoid probate.
What is a better investment than mutual funds? ›
ETFs can be more tax-efficient than actively managed funds due to their lower turnover and fewer transactions that produce capital gains. ETFs are bought and sold on an exchange throughout the day while mutual funds can be bought or sold only once a day at the latest closing price.
What are the problems with investment trusts? ›
Carthew says: “The main problem is that professional investors are not buying these funds, and some are actively selling them, because of misleading cost disclosure rules that make the professional investors' services look quite expensive to their underlying clients if they incorporate funds, and especially funds of ...
Benefits and risks of investment trusts
If the price of shares in one company falls, other shares may be able to make up for that loss. The price of shares increases and decreases, meaning there's a chance you'll lose the money you've invested.
What investment never loses value? ›
High-Yield Savings Accounts
The interest rates offered by high-yield savings accounts can vary widely depending on market conditions. But you'll never lose money on your principal and earned interest.
Why do trusts fail? ›
One of the most common reasons trusts fail is because grantors fail to fund them. Once a trust is created, they must be funded, which means assets must be re-titled into the name of the trust. Many people fail to do this, or do not do this properly.
Do investment trusts charge fees? ›
Investment trusts
In order to buy investment trust shares, you will normally have to pay dealing fees plus government stamp duty of 0.5%. Dealing fees are sometimes waived if you buy direct from the trust's management company through its in-house investment scheme.
How do investment trusts raise money? ›
Investment trusts have the ability to borrow money which can be used to buy shares or other assets. This is often referred to as 'gearing', and can enhance returns in a rising market, but detract from returns when a market falls.
Should I put my investment accounts in a trust? ›
To avoid probate on brokerage accounts, you must create a trust or fill out a TOD (transfer on death) form to transfer the money directly to your beneficiaries. It is generally better to retitle your investment accounts to your trust during your lifetime rather than rely on a TOD to transfer your accounts at death.
Are investment trusts better than unit trusts? ›
Cost: UTs are generally cheaper than ITs, because they do not have to pay the costs associated with being listed on a stock exchange. Liquidity: UTs are more liquid than ITs, which means that you can buy and sell them more easily. This can be important if you need to access your money quickly.
