Cade points to Jupiter European Opportunities as an example: last year its NAV grew by 30.9 per cent, impressive in itself, but the trust made a massive 53.9 per cent in share price terms thanks to the closing of a discount.
This shows that buying assets when they are out of fashion can result in massive returns and Cade says that investors should be on the lookout for such opportunities.
"You do get big differences between share prices and NAV. Ultimately it comes down to the fact that premiums tend to trade within certain ranges that reflect sentiment to the asset class."
"The risk is if you buy something on a premium of 10 per cent and it doesn’t deliver, you have to get back 10 per cent just to get back to where you started from," Cade said.
He adds that the discount is not the only thing to take into consideration, but warns that buying a trust on a premium can be risky, even if it has performed well recently, because if sentiment turns against the asset class then investors stand to lose out.
In the same way, the risk of buying a trust on a discount is that it widens further, leaving you nursing losses, and Cade says that you need to do your homework into the trust and sector at hand to avoid this happening to you.
"At the moment infrastructure funds are on a premium thanks to their yields. Although these funds are not volatile and we do not see pressure for premiums to disappear in the immediate future, with equity funds it tends to be much more cyclical and volatile and sentiment switches around more," he said.
The effect of a narrowing discount is not additive but multiplicative, Cade explains, using FE Alpha Manager Alexander Darwall’s Jupiter European Opportunities trust as an example.
Performance of price to NAV in 2012
Source: FE Analytics
As NAV increased by 30.9 per cent last year, anyone who had bought those same assets at market value with £100 at the start of the year would have investments worth £130.9 at the end of it.
However, as the trust was trading on a discount of 12 per cent, investors would have had to pay just £88 for those assets through the trust.
The share price grew by 53.8 per cent over the year, meaning that the investment would be worth £135.34 [88 x 1.538].
This corresponds to a premium of 3.2 per cent to NAV, 135.34 being worth 103.2 per cent of 130.9 [allowing for rounding].
"The effect is not just additive, it’s multiplicative, which is why it’s so powerful," Cade added.
Other examples of the power of this effect from last year include Dunedin Smaller Companies, which grew 30.5 per cent in NAV terms but 50.7 per cent in share price terms; North Atlantic Smaller Companies, up 17.7 per cent in NAV terms but 38.8 per cent in share price; and Pantheon International, a fund of private equity funds, which grew just 6.2 per cent in NAV terms but 41 per cent in share price terms.
The Private Equity sector did particularly well thanks to this effect in 2012, with six such funds converting single-digit NAV growth into share price rises of over 30 per cent and each finishing among the top-30 best-performing trusts of 2012.
Cade tips TR European Growth as a fund capable of making such a move in 2013.
"Performance has been strong recently," he said. "Obviously when you’re looking for opportunities it’s already got to show some signs of recovery and this fund has done very well of late."
"The trick is to catch it before it starts to appear in one- and three-year figures, when most people start to take notice."
"The share price has been rising for the past six months, so the turnaround is happening already. However, the discount is still about 16 per cent."
Data from FE Analytics shows that the trust has grown 37.19 per cent in the past six months while the HSBC Smaller Europe (ex UK) benchmark has made 29.48 per cent. The total expense ratio (TER) is 0.73 per cent.
Performance of trust vs benchmark over 1yr
Source: FE Analytics
"It invests in mid cap European equities and the manager has a good track record since he took over in mid-2011," Cade continued.
"A more specialist alternative is Impax Environmental Markets. It has a broad exposure to water- and power-type plays on a global basis, but that sector has had a difficult time now and the trust is trading on a discount of 17 per cent and faced a continuation vote last year."
Impax Environmental Markets has seen a dramatic uptick in performance in the past couple of months, growing by 12.2 per cent since the start of December, according to data from FE Analytics.
Performance of trust vs benchmark over 1yr
Source: FE Analytics
"We think it has a good investment team and as the asset class is out of favour, if it turns you will get the benefit of the discount narrowing. We do not see scope for the discount to widen further," Cade said.
The TER on the trust is 1.1 per cent.
Other trusts on a large discount include FE Alpha Manager Richard Plackett’s Throgmorton Trust, currently on a discount of 18 per cent, and the Caledonia Investments trust, which was examined in a recent FE Trustnet study.