Some of the best performing funds of funds over the past decade owe part of their success to scooping up investment trusts that moved to discounts during the financial crisis. 
These trusts then went on to see not only a recovery in their underlying company shares but also a narrowing of their discount or an eventual move to a premium.
Paul Craig’s Old Mutual Cirilium range and Unicorn Mastertrust are good examples. Buying at a discount can deliver a significant boost to long-term returns as the chart on the right shows.
With the help of Numis Securities head of investment company research Charles Cade, we take a look at five investment trusts that have moved to a discount below their three-year average in the recent precarious market movements.
Ruffer Investment Company
First up is this mixed asset portfolio managed by Jonathan Ruffer, Steve Russell and Hamish Baillie, who have a big emphasis capital preservation for longer term investors.
It is currently on a 2.17 per cent discount, having been on an average premium of 0.73 per cent over the past three years.
The managers’ approach is framed by macroeconomic views, says Cade, with a time frame that is far longer than that of the typical investor.
“For example, since early 2011 the fund has had significant exposure to Japanese equities (currently 16 per cent), while 50 per cent is invested in index-linked securities or gold, given the managers’ concerns about excessive debt and the likelihood of the return of inflation,” Cade (pictured right) said.
“The fund has a strong track record of insulating against market falls, but typically lags in rising markets. It performed particularly well during the global financial crisis with the NAV up 26 per cent in 2008 compared with a 30 per cent fall in the FTSE All Share, but performance has been dull over the past three years.”
Since launch in 2004 it has returned 98.03 per cent beating the gain in the FTSE All Share by 40 percentage points.
Performance of trust, sector and index since launch
Source: FE Analytics
The fund has an ongoing charges of 1.13 per cent. It has no gearing.
Next up is this £1.1bn investment trust, which has been headed up by manager Job Curtis since 1991. Curtis, who has increased the trust’s dividend every year since he took over, is generally a large-cap enthusiast in businesses such as BAT, BP and HSBC but also dips into small and mid-caps at times.
City of London has been on a discount since February, which currently is 0.2 per cent. It has not been on a discount or on par for at least a decade and its three-year average is a premium of 1.68 per cent. In the past year its premium has been as high as 3.24 per cent.
In the past 10 years the fund has returned 40 per cent, compared to an IT UK All Companies sector average of 28.50 per cent and a gain in the FTSE All Share of 12.84 per cent.
Performance of trust, sector and index over 10yrs
Source: FE Analytics
Cade said: “We regard the fund as a core holding for investors seeking income from UK equities as it offers mainstream equity exposure with a bias toward large-caps and defensive sectors such as utilities. Performance has been strong, helped by underweight exposures to oil & gas and mining”.
“It benefits from a very experienced manager and has the lowest ongoing charges ratio in the sector. The yield, paid quarterly, is significantly higher than the FTSE All Share yield of 3.7 per cent.”
The fund has an ongoing charges figure of 0.42 per cent and a current yield of 4.2 per cent. It has 10 per cent gearing.
Aberdeen’s Bruce Stout has run this £1.1bn trust since 2004. The usually bearish manager has run a cautious portfolio for many years, which has seen him underperform peers over three and five-year periods but he is still top of the IA Global Equity Income sector over 10 years.
Performance of trust, sector and index over 10yrs
Source: FE Analytics
“It is a strong long-term performer through a focus on quality companies with strong management teams, solid balance sheets and the ability to protect margins. The mandate is global, but the manager pays no attention to index weightings,” Cade said.
He adds that in 2014 and 2015 performance suffered from a bias towards value stocks in Asia and emerging markets and a low exposure to the US relative to other global funds.
“However, it has been one of the strongest performers in 2016 year to date, with the net asset value up 15.9 per cent on the back of a recovery in performance of several of the largest holdings.”
“The fund pays an attractive quarterly yield of 4.9 per cent per annum. Ongoing charges in 2015 were 0.75 per cent and the fee level has been reduced for 2016, with the performance incentive removed.”
Stout has recently sought out more recovery-style stocks, believing a buying opportunity is opening up in bombed-out mining and energy companies.
The trust is on a discount of 1.42 per cent. Its three-year average is a premium of 4.21 per cent.
The fund has an ongoing charges figure of 0.73 per cent and it is 14 per cent gearing.
Next is this £162m trust run until recently by FE Alpha Manager duo Rosemary Banyard and Andy Brough.
The pair have headed up the portfolio since 2003, clocking up a total return of 515.13 per cent against a sector average of 168.84 per cent and a gain in the index of 306.98 per cent.
Performance of trust, sector and index since 2003
Source: FE Analytics
The fund is currently on a discount of 12.6 per cent versus a three-year average discount of 8.12 per cent.
Cade says the discount has widened this year partly as a result of market volatility and investor fears over Brexit. However, he adds another factor is that Rosemary Banyard stepped down on 31 March 2016 having spent 17 years at Schroders.
“Andy Brough, co-manager with Rosemary, has taken over as lead manager and the team has been strengthened with the appointment of Jean Roche from Hargreave Hale. We do not expect the change in management responsibilities to alter the stock-picking investment approach,” he said.
The fund has an ongoing charges figure of 0.95 per cent. It has no gearing.
Invesco Perpetual Select Global Equity Income
Last up is this £50m trust run by Nick Mustoe. As well as heading the trust since 2012, Mustoe is also chief investment officer at Invesco Perpetual.
It is on a current discount of 0.88 per cent versus a three-year average discount of 0.13 per cent.
Since Mustoe took over the portfolio it has returned 45.91 per cent against a sector average of 20.74 per cent and a gain in the index of 42.97 per cent.
Performance of trust, sector and index under Mustoe
Source: FE Analytics
This means it is the only portfolio in the sector to beat the MSCI World index over this period.
The fund has an ongoing charges figure of 0.97 per cent and a current yield of 3.7 per cent. It has no gearing.
