Sibling rivalry: how ‘sister’ funds diverge on performance and cost

It’d be logical to assume that two portfolios run by the same manager, with the same process, would deliver the same level of returns and charge you the same too. But like all twins, while it might be tough to tell apart, each one has its own set of quirks.

Products which mirror in this way are colloquially referred to as ‘sister funds’ and it’s when an investment firm has an open-ended fund and a closed-ended investment trust run according to the same remit, by the same manager.

There’re 35 of them in the UK and among them are some of AJ Bell customers’ favourite trusts, including Fidelity Special Values, JPMorgan Emerging Markets Growth & Income, Merchants Trust and Finsbury Growth & Income.

How has the performance differed?

Over 10 years, 28 investment trusts beat their open-ended equivalent, data from the Association of Investment Companies (AIC) found.

Over the past 10 years, the average investment trust with a sister fund returned an extra £31 per £100 invested compared to the fund. In percentage terms, investment trusts outperformed their sister funds by an average of 1.3 percentage points per year.

Over five years the number of trusts which beat their open-ended fund direct counterparts stands at 26 and totals 37 on a three-year view.

Why would the performance differ?

Nick Britton, Research Director at AIC, the trade body for investment trusts, explained that trusts’ ability to invest in less liquid areas of the market such as private assets or small caps benefits their long-term returns.

These are historically some of the biggest sources of growth in equity markets and trusts also benefit from not having to sell their holdings to meet redemptions, something which can affect open-ended funds during tough market periods .

That doesn’t mean trusts always outperform the fund version. Taking Polar Capital's portfolios as an example, the open-ended version has delivered better long-term returns than the trust version, 1,152% versus 965.4% over 10 years.

Britton explains that trusts may struggle “especially in down markets when discounts tend to widen. But over a market cycle, investment trusts’ structural advantages support strong performance”.

Discounts have been particularly wide for investment trusts over the past five years, widening from 4% at the end of March 2021 to 14% at the end of March 2026, aligning with the dip in the number of closed-ended versions outperforming.

There are also some discrepancies in charges between sister funds and just in this group of five; the trust version is cheaper than the open-ended option. The JP Morgan portfolios have the biggest difference, with 1.12% for the fund and 0.79% ongoing charges for the trust.

Why have an open and closed-ended version?

Part of the reason trusts may cost less than funds is due to their structural differences, the nuances of which is why firms will have these two versions of the same portfolio.

Funds continuously create and redeem shares/units when investors put money in or take money out, and the portfolio will grow and shrink in size depending on investor demand.

The price of the units is determined by the net asset value (NAV) of the underlying portfolio of assets held by the fund, which is priced once a day. This value will vary in line with the portfolio’s performance and the level of investor inflow and outflow.

Meanwhile, a trust – which will list on the exchange and trade like a public company – has a fixed number of shares established at the IPO and investors to buy or sell these among themselves.

This structure allows managers to invest in less liquid assets without worrying about investor withdrawals because they aren’t forced to sell assets to meet demand, which has a big impact on the long-term performance and can lead to fewer dealing costs.

But its share price is dependent on two key factors, first, the performance of the underlying assets, and supply and demand for the shares. At any particular time, the shares could be trading at a discount to the value of the underlying assets (where investor demand is low), or at a premium (where investor demand is high).

This means a trust can trade above or below the NAV and can give investors an opportunity to buy into a manager’s strategy for less if it’s running on a discount. Although equally it adds a layer of complexity which some investors may not like.

Funds are a tad easier to get your head around as you don’t have to navigate premiums or discounts.