Over the ten years to March 2026, the average investment trust outperformed its open-ended sister fund by £31 for every £100 invested, according to Association of Investment Companies (AIC) research cited by MoneyWeek. That means a £10,000 stake in the typical trust would have grown to roughly £3,100 more than the same money in a fund run by the same manager — no extra effort, just a different structure. The gap comes down to features that most people don’t realise exist: fixed share numbers, the ability to borrow, and the freedom to hold back a slice of income for a rainy year.
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Those numbers don’t mean investment trusts win every time. In a falling market, discounts tend to widen and gearing can magnify losses. But the structural differences between the two vehicles are deep enough that they suit different goals, different time horizons, and different types of assets. Open-ended funds are simple, daily-priced, and easy to buy small amounts of each month. Investment trusts trade on the stock exchange like shares, can trade at a discount or premium, and their managers never have to sell holdings just because investors want their money back. Understanding asset allocation strategies helps make sense of where each one fits. Here’s what you actually need to know.
What makes an investment trust different from a fund
At the simplest level, a fund creates new units whenever someone invests and cancels them when someone cashes out. That’s called an open-ended structure. An investment trust, on the other hand, issues a fixed number of shares that trade on the London Stock Exchange. No new shares are created to meet demand, and none are cancelled when someone sells. That is what people mean by a closed-ended structure.
What I tend to notice is that most people assume all collective investments work the same way. They don’t. The closed-ended structure is the root of every other difference — gearing, revenue reserves, discounts, and the long-term outperformance figures. Open-ended funds are simpler and more widely used, but that simplicity comes with trade-offs. When markets turn volatile, open-ended fund managers may be forced to sell holdings to meet redemptions, sometimes at the worst possible prices. Investment trust managers never have to. That’s a structural advantage that shows up clearly in the data. If you’re building a portfolio gradually, you might also want to read the lazy investor’s guide to building wealth in the UK.
Performance, discounts, and the real cost of choosing wrong
The AIC tracked 50 pairs of sister funds — investment trusts and open-ended funds run by the same manager — and found that the trust outperformed in the majority of periods. The table below shows the gap in pounds per £100 invested, alongside the percentage of trusts that came out ahead.
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| Time period | Extra per £100 from trust | % of trusts that beat the fund |
|---|---|---|
| 1 year | £5 | 82% |
| 3 years | £6 | 72% |
| 5 years | £3 | 53% |
| 10 years | £31 | 77% |
The 10-year figure is the standout. A £31 gap per £100 means a trust compounded at a noticeably higher rate over a full market cycle. Five-year numbers are tighter, partly because the period covered the post-pandemic recovery and the discount widening that followed.
Gearing adds another layer. Investment trusts can borrow to invest — open-ended funds cannot. The Fidelity comparison notes that Foresight Solar Fund had 31% of its gross asset value in debt and its shares were trading at a 38% discount. Gearing magnifies everything. In a rising market it boosts returns; in a falling market it accelerates losses. Fees also differ. Active open-ended funds typically charge 0.75% to 1.5% per year, while some investment trusts run as low as 0.39% (City of London) or 0.42% (Henderson Smaller Companies), according to Janus Henderson data from March 2020. But trusts also incur stamp duty on purchases, which funds do not, and platform fees can eat into smaller holdings.
Three mistakes people make with trusts and funds
Buying a trust without checking the discount or premium
A trust trading at a 14% discount means you get 86p of assets for every pound. That sounds like a bargain. But if the discount widens to 18%, you’ve lost money even if the portfolio rises. The Invesco guide points out that share price is driven by supply and demand, not just the underlying value. Premiums are equally dangerous. Paying 110p for 100p of assets means you start in a hole. The fix is to check the discount or premium before every purchase — most platforms display it alongside the price — and factor it into your expected return.
Ignoring the effect of gearing on volatility
Gearing works like a magnifying glass. A trust with 20% borrowings gains 20% more in a rising market but loses 20% more in a fall. The Fidelity example of Manchester & London Investment Trust — which had 40.5% of its portfolio in Nvidia and 10% in Broadcom at the end of January 2026 — shows how concentration and gearing can combine. That trust is not typical, but it illustrates the point: gearing demands a longer time horizon and a higher tolerance for drawdowns. If you need the money in three years, a geared trust is probably the wrong vehicle.
Assuming the lowest charge always wins
Investment trusts often have lower ongoing charges than active funds. But the total cost of owning a trust includes platform fees, trading commissions, stamp duty, and the bid‑offer spread on the shares. Open-ended funds may have no dealing costs on a regular savings plan. For someone investing £50 a month, a low-cost fund often works out cheaper than a trust, even if the trust’s annual charge is half the size. The Trustnet comparison notes that choice should depend on investment goals, risk tolerance, and the impact of fees on returns — not just the headline number.
How to match the vehicle to your goal
When the closed-ended structure works best
Investment trusts shine in assets that are hard to sell quickly. Property, infrastructure, private equity, and forestry all benefit from a manager who doesn’t have to sell into a falling market just to raise cash. Open-ended funds holding these assets have suspended trading in the past — most notably property funds after the 2016 Brexit vote and again during the pandemic. A trust trading at a discount will still trade, even if the underlying assets are hard to value. That makes trusts a natural fit for the less liquid parts of a portfolio. For a broader look at how to combine different asset types, the essential guide to UK bond investments covers one of the pieces.
Income vs. growth: which vehicle suits which
If you want a rising income stream, the structural advantage belongs to trusts. Open-ended funds must distribute all the income they earn each year. Trusts can keep up to 15% in reserve, topping up distributions in lean years. City of London Investment Trust has raised its dividend for 59 consecutive years — a track record no open-ended fund can match. The trade-off is that the income is not guaranteed and the share price can fall sharply. For growth, the case is less clear-cut. In liquid global markets, low-cost open-ended funds and ETFs can match or beat trusts because they don’t carry discount risk. The Invesco insight stresses that both have a role in a diversified portfolio, and the choice depends on the specific market and the manager’s ability to add value.
What’s changing: the discount cycle and new rules
Discounts are cyclical. The average trust discount widened from 4% to 14% between March 2021 and March 2026, according to MoneyWeek. If the cycle turns, narrowing discounts could add a tailwind for trust investors. On the regulatory side, the FCA and the UK government have been reviewing the investment trust sector, particularly around how costs are disclosed and whether the 15% income retention rule remains appropriate. No concrete changes have been enacted yet, but the direction of travel points toward greater transparency. That could mean more pressure on trusts with persistently wide discounts, and a clearer comparison for investors who are trying to decide between the two structures. If you’re weighing up whether to manage your own choices or get help, the DIY investing vs. advisor guide covers the trade-offs.
Frequently asked questions
Can I hold investment trusts in an ISA or SIPP? ▾
What happens if an investment trust’s discount keeps widening? ▾
Do investment trusts pay out all their income? ▾
Is it cheaper to buy a fund or an investment trust? ▾
Can an investment trust suspend trading like a fund can? ▾
Why the structure matters more than the label
The outperformance data is clear, but it comes with a catch. Investment trusts have outperformed on average, but averages hide wide variation. Some trusts have lagged badly, and discounts can wipe out years of management skill. The real question is not which label is better, but whether the structural features of a trust — fixed capital, gearing, revenue reserves — match the assets you want to own and the time horizon you’re working with. For illiquid assets and long-term income, trusts have a built-in edge. For low-cost global exposure with the ability to drip-feed cash, open-ended funds are often the simpler choice. Tax-efficient investment wrappers can help you hold either one more effectively.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
If this was useful, you might also want to read Forget get-rich-quick: sustainable investing for long-term UK wealth.
Sources and Further Reading
Understanding asset allocation strategies in the UK — A practical guide to how stocks, bonds, and alternatives fit together in a portfolio, including when to use trusts versus funds for different asset classes.
DIY investing vs. advisor: what’s right for you in the UK — Helps you decide whether to build your own portfolio of trusts and funds or get professional help, with clear cost and time comparisons.
MoneyWeek / AIC (2026). Investment trusts are outperforming funds — which is best for your portfolio? 🔗
Fidelity (2026). Funds vs. investment trusts: 4 key differences explained. 🔗
Janus Henderson (2026). Investment trusts and funds — so what’s the difference? 🔗
Invesco (2026). Investment trust or fund? 🔗
