Are you wondering where to channel your Isa this year? Perhaps you are contemplating a shift from the familiar terrain of unit trusts and open-ended investment companies to the uncharted territory of investment trusts and other closed-end investment companies? 

It’s not earth-shattering news that closed-end funds, because of their structure and ability to gear, tend to outperform open-ended investment companies; nor is it surprising that  investment trust total returns also benefit from lower total expense ratios. 

But new research from stockbroker Collins Stewart underlines just how skewed investor take-up of the two types of collective is – and how illogical. Looking at data for the 10 years to the end of 2010, it shows that the unit trust industry has more than doubled in value, from £261 to £578 billion, while investment trust assets are up just £14 billion, from £79 to £93 billion. 

Yet closed-end funds produced better net asset value total returns than open-ended funds in eight out of the nine main sectors over that period. Only the UK smaller companies sector failed to beat the equivalent unit trust sector. 

Closed-end funds also outperformed the relevant benchmark in seven out of those nine sectors, while open-ended funds underperformed in every sector. 

In terms of share price total returns, investment companies did even better, outperforming the equivalent open-ended sector in all but one of the main sectors (UK smaller companies again) – often by an impressive margin. For instance, the global growth investment company sector average price increased by 93 per cent over 10 years, while the unit trust equivalent rose by 24 per cent. Global emerging markets investment company prices were up more than 450 per cent on average, against 300 per cent for the unit trust sector.

Alan Brierley, author of the Collins Stewart report, highlights the contrasting fortunes of two similar funds from the same manager to illustrate the mismatch between performance and success in attracting new investment.

The BlackRock World Mining investment trust has delivered a compound annual growth rate of almost 26 per cent over the past 10 years, while its sister unit trust, BGF World Mining, chalked up 23 per cent. Yet over that time, while the investment trust has increased in size almost 10-fold through organic asset growth, assets under management in the open-ended fund increased by more than 700 times, from $23 million to a staggering $17 billion.

That preference for the poorer-performing alternative, and for open-ended funds generally, is a reflection of advisers’ bias towards investments that pay them commission, Brierley says. ‘While it’s impossible to quantify the impact of commission paid to so-called independent advisers, it’s fair to say superior performance has certainly not been the key driver,’ he adds drily.

Will the end of commission bias from the end of 2012 prove a leveller? It’s certainly a tremendous marketing opportunity that trusts cannot afford to miss.