While many investors are wary of buying into a trust on a wide discount, the rewards on offer can be significant if they get their choice right. With many industry commentators expecting a significant fall in valuations, it may be worth keeping an eye on trusts that already look cheap. 


Lowland Investment Company – discount of 5.2%

The popularity of equity income portfolios means the majority of trusts in the IT UK Growth & Income sector are on a premium; however, there are a handful trading on a discount to net asset value (NAV). 

One that Winterflood Securities’ James Brown rates in particular is James Henderson’s £284m Lowland Investment Company.   

"The manager is highly rated and has been manager for many years," he said. "It had a difficult time last year but its record is very strong." 

The trust tends to underperform in down markets, as seen in 2008 and the second half of 2011. However, Henderson’s longer-term record is extremely strong.

Performance of trust vs index over 10-yrs

Name	1-yr returns (%)	3-yr returns (%)	5-yr returns (%)	10-yr returns (%)
Lowland Investment Company	0.37	100.21	7.16	190.27
FTSE All Share	-2.57	37.3	7.69	110.58

Source: FE Analytics

Over three years, the fund is up more than 100 per cent compared with 37.3 per cent from its FTSE All Share benchmark.

While a poor 2008 means that it has slightly underperformed over five years, it has got one of the best records of any UK Growth & Income trust over 10, with returns of 190.27 per cent. 

Performance of trust vs index over 10-yrs



Source: FE Analytics

As the graph above shows, this trust is not for the faint-hearted and is susceptible to steep gains and losses. 

However, for those who expect better from the UK market in the medium- to long-term, this could be an appealing prospect – particularly given that it is currently trading on a discount of 5.2 per cent. 

It is a multi-cap fund with significant exposure to the FTSE 100, FTSE 250 and mid caps. The trust’s top-10 holdings include blue chips such as Shell and Glaxo, as well as much smaller companies including Carclo and Interserve.  

Henderson has headed up the portfolio since 1990. It has a total expense ratio (TER) of 0.68 per cent and is currently yielding 3.59 per cent. 


Standard Life Equity Income Trust – discount of 10.4%

This is far less volatile than Henderson’s trust, invested predominantly in FTSE 100 stocks. Trading on a discount of 10.4 per cent – the second-highest in the sector – some may view a stable portfolio such as this as an attractive prospect.  

According to FE data, it has fallen only slightly short of its benchmark over one-, three-, and 10-year periods.

Its widening discount has much to do with its poor performance over the last 12 months – the portfolio is down 9.8 per cent, compared with just 2.57 per cent from the All Share. 

Performance of trust vs index over 10-yrs

Name	1-yr returns (%)	3-yr returns (%)	5-yr returns (%)	10-yr returns (%)
FTSE All Share	-2.57	37.3	7.69	110.58
Standard Life Equity Income Trust	-9.8	31.82	8.95	92.26

Source: FE Analytics

The trust has been headed up by Karen Robertson since November 2005. Thomas Moore, who has been credited with turning around the performance of the Standard Life UK Equity Income Unconstrained fund, joined her on the team late last year. 

Standard Life Equity Income Trust is currently yielding 4.77 per cent and has a TER of 1 per cent. GlaxoSmithKline, Shell and HSBC are the managers’ three biggest holdings.