Navigating the extensive array of investment opportunities can be daunting for investors, especially when it concerns choosing between different types of funds. This challenge is notably evident when comparing what are called sister funds.

Sister funds arise when an investment firm offers both a fund and an investment trust with similar investment strategies, often managed by the same individual and bearing almost identical names. A prominent example is the Lindsell Train UK Equity fund, managed by the well-respected Nick Train, who also oversees the Finsbury Growth and Income investment trust. Notably, nine out of their ten main holdings intersect, featuring renowned companies such as Experian, Sage, and Unilever, resulting in strikingly similar performance metrics.

Why do investment firms choose to develop both funds and trusts?

This dual approach allows them to cater to varied investor preferences, as some individuals may favor the structure of funds over trusts, or vice versa.

Both funds and investment trusts pool investors’ money, allowing professional managers to make investment decisions. However, open-ended funds enable investors to purchase “units,” which can be created or canceled based on market demand, without a ceiling on the total number of units.

Conversely, investment trusts operate as closed-end entities listed on stock exchanges. When investors buy shares in these trusts, a fixed number of shares are available, thus their prices fluctuate with market demand, impacting overall returns.

This structural complexity has led many investors to regard funds as the more convenient choice, considering they are generally simpler to comprehend and interact with. Some critics suggest that this ease of expansion for open-ended funds may lead investment firms to favor them in terms of fee generation.

When deliberating between sister funds, two critical factors warrant attention: costs and performance.

Research comparing 41 pairs of sister funds revealed that 68% of the time, investment trusts carried lower fees than their fund counterparts. Over a decade, investment trusts also typically outperformed funds, although funds performed slightly better within shorter time frames.

Jason Hollands from Bestinvest emphasized the importance of evaluating all available options and not adhering strictly to one type over the other, as both types warrant consideration.

While several factors in investing are beyond your control, the fees you incur is a manageable aspect.

The analysis highlighted that while fee discrepancies between sister funds can be minor, significant differences do exist in some cases. For instance, the Invesco Perpetual UK Smaller Companies Trust charges an annual fee of 1.04%, compared to its sister fund’s 1.62%. Similarly, the BlackRock World Mining Trust charges 0.91%, while its corresponding fund charges 1.31%.

To illustrate the impact of fees: investing £10,000 in a fund with a 6% annual return and a 1.5% fee would yield £15,530 over ten years. If the fee were reduced to 0.75%, you would end up with £16,681—an increase of £1,151.

Invesco reported that fees for its lowest-cost fund share class were 0.87%, clarifying that no retail investors are charged 1.62%. They noted inherent price variations between investment trusts and mutual funds due to differing structural, operational, and regulatory elements.

Comment from BlackRock was pending.

Performance-wise, Bestinvest found that nearly 59% of sister funds outperformed their investment trust brethren over a three-year horizon, with 54% surpassing them over five years. However, investment trusts demonstrated superior performance over ten years, outperforming their sibling funds 61% of the time.

Several mechanisms contribute to the investment trusts’ success. Investment trusts can utilize gearing (borrowing funds) to amplify their investment endeavors, potentially enhancing gains but equally increasing risks during downturns.

Additionally, investment trusts can cultivate dividend reserves, allowing them to retain earnings in favorable years, which helps sustain dividends during leaner periods, ensuring stable long-term results.

Nonetheless, outcomes can be unpredictable. For example, the Schroder Asian Total Return Fund boasted a 143% return over ten years, while its associated trust achieved 204%. Conversely, the Baillie Gifford European Fund outpaced its trust counterpart with a return of 123% versus 50%.

There are also instances where an investment trust may carry higher fees than its sister fund. Moreover, some pairs are nearly identical, as evidenced by the Polar Capital Healthcare Blue Chip Fund and its investment trust, both yielding 163% over ten years, with the trust being only 0.09% cheaper than the fund.

Ultimately, a fund’s structure alone does not dictate its performance; investment success is influenced by various factors, including the manager’s acumen, investment timing, and the fees associated with the investment platform (some platforms impose higher charges for trusts).

Personally, I exhibit a preference for investment trusts in cases where other factors remain consistent. Their transparent structure as independent companies, combined with governance by an outside board of directors, offers additional assurance. Furthermore, investment trust managers often have significant personal investments in their trusts, which I find aligns their interests with those of the investors. If these trusts also tend to be more economical and deliver better performance, it is all the more appealing.

However, this analysis serves as a reminder that assumptions should not be taken for granted in the investment sphere.