The war is hotting up between unit trusts and investment trusts. The beginning of October saw the launch of the Association of Investment Trust Companies' (AITC) £18m advertising campaign, designed to increase demand and narrow discounts on investment trusts.

Investment trust shares trade on discounts of premiums to underlying assets, depending on investor demand. However, in recent years discounts have widened as demand for investment trusts has ebbed away.

Instead most mainstream private investors have turned to unit trusts. Indeed, the unit trust market is now three times the size of the investment trust market. This is a frightening statistic given that just 25 years ago the investment trust industry was twice the size of the unit trust industry.

The main problem for investment trusts has been their discount volatility. Understandably, most investors prefer the relative security of unit trusts as they can be confident that if they sell a unit trust the price will more closely reflect the value of the underlying holdings.

For many investors investment trust discounts are just an unwanted extra layer of risk.

But the AITC's campaign could possibly tilt the balance away from unit trusts. It is seeking to attract scores of new investors through press, television and billboard advertising. If the campaign is successful, the new flows of investment could narrow discounts and pass on billions of pounds of shareholder value to investors.

Investment trusts have another weapon in their armoury. Since April, changes to advance corporation tax rules suddenly made it more tax efficient for them to buy back their own shares.

Trusts which buy back shares effectively reduce the number of shares in circulation so that the same number of investors are chasing a smaller number of shares.

There is some evidence to suggest that this tactic may prove effective in narrowing discounts.

But discounts will never disappear altogether. If investment trusts are to steal a march over unit trusts this can only be done on performance and charges.

On the charges front, investment trusts fare rather well. Because investment trusts are closed ended they are cheaper to run and they therefore often have lower charges then unit trusts.

Performance is much more difficult to determine. Investment trusts are quite heavily weighted towards smaller companies and emerging markets and so, as a whole, have tended to lag behind unit trusts in recent years.

The fortunes of smaller companies have improved significantly so far this year, providing a strong boost for investment trusts. In the year to the end of September the average investment trust had risen over 47 per cent in share price terms compared to 29 per cent for unit trusts.

However, while there headline figures may inspire new interest in the investment trusts sector, the key issue for any new investor is how the performance of a fund will compare with another with a similar investment objective. Investors who really want to get to grips with an investment trust's performance profile should compare it with other investment trusts and unit trusts in the same sector.

In the Isa (individual savings account) market, unit trusts appear still to be winning more ground than investment trusts. Perhaps the most notable trend in investment patterns in recent months has been the growth in overseas investment. Much of the Isa money is being invested internationally.

Unlike personal equity plans (Peps), Isa have no geographical investment restrictions. The Association of Unit Trusts and Investment Funds (AUTIF) estimates that Isa investors are saving almost four times as much money internationally as they did with Peps. So far, around 300,000 Isas have been invested outside the European Union.

The coming months will be interesting times for both unit and investment trusts. Investment trust analysts and institutional investors will be keeping a watchful eye on investment trust discounts to see if there is investor flows.

But for new investors, now may not be the best time to be investing in stock markets. Markets are expected to be volatile in the run up to the millennium.

Unsure investors could be better off delaying their investment decision until the New Year.

Tabular Information in Adobe PDF format - The top-performing collective funds over five years


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