Some equity investment trusts and open-ended mutual funds are rather like non-identical twins in their makeup, often mirroring each other in management and holdings but markedly different in personality. 

Investment trusts are not particularly popular among DFMs in our database but, as we recently covered, some of their open-ended twins are. For example Temple Bar isn't held by a single allocator but Redwheel UK Equity Income is one of the most popular funds of its type.

Fidelity Special Situations is also more popular than Fidelity Special Values.

But the recent news surrounding cost disclosure requirements is a big win for the trust sector, and this got us thinking – to what extent has their relative appeal increased now when compared to the traditional mutual fund structure? Many in the investment trust sector certainly think it is a gamechanger.

As Dan Jones of our sister publication the Investor’s Chronicle wrote, unclear costs were certainly a headache to MPS providers in the past: 

“It's tricky to explain the double-counting process to clients without making them think the wool is being pulled over their eyes. Far easier to just buy something else, be it individual shares, an open-ended fund, or a ‘cheaper’ closed-ended fund.”

So now it’s supposedly more appealing to hold trusts – what happens next?

Well, for DFMs at least, we believe clearer cost documents won’t change much in attracting them to closed-ended vehicles, in part because trusts themselves can be oh so cumbersome. 

“We don't see this as a silver bullet, but those buyers that are cost conscious might find it more attractive,” said James Calder, chief investment officer at City Asset Management. 

“The same issues still remain – it's still a little bit more complicated for our private investor to invest in these things, whereas open-ended funds are just easier.”

That ease comes in a number of forms, according to Calder. First, platforms are much less friendly to facilitating the trading of trusts. Similarly, launching a new investment company takes a lot of work and more AUM to make it viable – so mutual funds are more innovative and a lot of the heavy lifting is done by sales teams. 

Why do equity investment trusts often have an open-ended equivalent anyway? Why wouldn’t you just buy the IA version instead given all these constraints? 

Calder explained that historically, brokers would play arbitrage between the open and closed strategies should discounts become available. 

There are other merits, too.

To give one example, Quilter Cheviot uses JP Morgan American trust in preference to its open-ended sister fund.

Nick Wood, head of fund research, said this particular structuring has several key advantages.

“Firstly, it has a slightly wider remit, including a broad small cap sleeve alongside the 40 large cap stocks,” he said. “Secondly, it benefits from being a trust, such as having the ability to use gearing. And lastly, fees are lower, with the open-ended fund priced at 85 basis points, compared to 38 basis points for the trust.”

The trust is a standout performer in the active US space, having trounced the S&P 500 over five years.

He also thinks there will be a material impact from the cost disclosure rules over time, but that it alone is unlikely to cause a rapid switch into closed-ended funds as a result. 

For now, Asset Allocator reckons the main determinant of demand for investment trusts lies in interest rate cuts, especially for Reits and private markets.