Out-of-favour investment trusts are a little more complex but can offer valuable diversity

Investment trusts are in the doldrums compared with their more popular rival, unit trusts. You may have been put off by their seemingly complex nature, or have just wanted to stay well clear of anything with the words "discount" or "gearing" in it.

But if you ignore investment trusts, you could end up missing out on potentially higher returns than if you bought an ordinary type of fund. And with changes in the way investment products are sold coming in at the start of next year, now is the time to ask if you should be looking at investment trusts.

"Five to 10 years ago, it was common for people to say discounts or gearing were the reason they wouldn't look at the sector because it is an extra layer of risk," says Jemma Jackson at the Association of Investment Companies. "Investment trusts are also a lot smaller than unit trusts – it wasn't always the case, but the unit trust sector has overtaken; there are more funds, with more assets."

So what makes investment trusts different? First, they are "closed-ended", meaning they don't issue or redeem shares on a daily basis in response to demand, and the number of shares available is fixed. You either buy the shares when the trust is launched, or afterwards on the stock market.

The price of the shares, though, can be affected by a range of issues, from how the economy is faring to the popularity of that investment, rather than just the value of the holdings, as is the case with unit trusts.

And investment trust share prices are affected by two factors, not one, like other funds. There is the value of the assets owned by the trust – the "net asset value" (NAV) – and there is the share price paid by investors. A trust is said to be at a "discount to NAV" when it is cheaper, usually because there is a lack of demand.

So why bother? Ms Jackson says that over 10 years, the average unit trust is up 92 per cent, but the average investment trust is up significantly more, at 144 per cent.

Investment trusts are generally cheaper than unit trusts in terms of fees, and Ed Morse at F&C Investments says the lower charges do in fact translate into better returns.

The annual management charge on an open-ended fund investing in global equities is about 0.75 per cent a year, whereas an investment trust with similar holdings would charge 0.4 to 0.5 per cent, says Mr Morse.

There are other costs to take into account for both types, though, and the more complete figure is called "ongoing charges" or the "total expense ratio".

Ms Jackson says the average ongoing charge is 1.59 per cent, while this figure can be up to 1.75 per cent for open-ended funds.

And don't be put off by words like gearing and discount. If anything, as Ben Willis at Whitechurch Securities explains, these are two advantages of investment trusts that other funds don't offer. Discounts allow you to buy shares at a lower price than the actual value of the trust.

"Over time, the share price will trend towards the net asset value, and picking up investment trusts on wide discounts can provide accelerated gains if equity markets rise," says Mr Willis. "Not only will the NAV increase but the discount will narrow."

There are many investment trusts offering access to different areas such as property and private equity, which are harder to find in the open-ended funds market. Arguably cheaper, potentially better performing over the longer term and with a level playing field from the start of next year, investment trusts are coming into their own and are well worth looking into.

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