An open-and-shut case: buy investment trusts

Here's some news that unit trust managers (and the financial advisers who sell their products) won't want you to hear. Over the last decade, investment trusts (also known as closed-end funds) have beaten their open-ended rivals (such as unit trusts and OEICs) in almost every area.

An updated report on the sector from financial advisory group Collins Stewart shows that over the ten years to 31 December 2011, "investment trusts have outperformed open-ended funds by a healthy margin in eight out of nine regional sectors, and relevant benchmarks in seven". The only sector where investment trusts failed to come out on top was in Japan. Over the same period, unit trusts underperformed their benchmarks on average in every sector. Five- and one-year results were similar.

In the financial world it's rare to see quite such an open-and-shut case: investment trusts have clearly been far better vehicles to invest in than their open-ended rivals. There are several reasons for this, but the most obvious one is that their management fees tend to be lower, sometimes by a full percentage point or more. It makes sense that if less money is taken by the managers, then there will be more left in the pot for you, the investor.

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Yet, despite this clear outperformance, the investment trust sector seems to have passed ordinary investors by. While the total value of the OEIC and unit trust sector has grown by 142% from £236bn to £571bn over the past ten years, the investment trust sector has seen far more pedestrian growth, increasing by 33% from £68bn to £90.3bn. Why the gap?

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It's simple: money. Open-ended funds pay commission. Investment trusts, by and large, don't. That's why they're generally cheaper than unit trusts. It's also why financial advisers have tended to ignore them. The good news is that with a ban on commission set to come in with the Retail Distribution Review at the end of this year, this could be a "golden opportunity" for investment trusts to get the exposure they deserve, says Collins Stewart. Given their better track records and lower total expense ratios, it shouldn't be difficult for fund managers to make the case for them.

Meanwhile, until commission is banned, do your own research into what's available. As Jeff Prestridge notes on Thisismoney.co.uk: "If you use an adviser and they say an equivalent unit trust is a better option, tell them it's your best interests they should be looking after, not theirs."