In a world of overvalued equities, bonds and just about any other investment opportunity out there, it may surprise some investors to know that there are a number of investment trusts currently trading at rather large discounts. 
While it is important to note that discounts can remain in place indefinitely and there are no guarantees that they will not in fact widen further, there are some opportunities to be made from potentially oversold or mispriced trusts.
Informed Choice managing director Martin Bamford (pictured) said: “The size of the discount should not be your main reason for choosing a particular investment trust, although it’s always a nice bonus should the discount close before you sell your holding.”
In the last few years investment trusts have become more prevalent in investor portfolios. Below, FE Trustnet asks the experts which investment trusts currently look attractive based on its discount.
“Considering funds with attractive discounts, the average discount in the UK equity income sector currently is 5.5 per cent. Within UK All Companies [sector], the average discount is a larger 9.1 per cent,” Bamford said.
“One fund displaying an attractive discount is Schroder UK Mid Cap, which is a solid long-term performer. It aims to beat the return of the FTSE Mid 250 (ex-Investment Companies) Index.”
The fund is on a 21 per cent discount to net asset value (NAV) currently with total assets under management of £208m, according to the latest data from the Association of Investment Companies (AIC).
UK mid-caps have outperformed over the long-term, as highlighted in an article earlier this week, and the fund has been a top performer over the longer term.
Indeed, it has been a top quartile performer in the IT UK All Companies sector over 10 years – though there are only 14 trusts with a long enough track record in the sector.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
Perhaps more pertinently, the trust has beaten the FTSE 250 over five- and 10-year periods, ahead by 9.61 percentage points over the past decade, though it has struggled more recently.
Run by FE Alpha Manager Andrew Brough and Jean Roche, the fund, which owns 63 holdings, has a high weighting to financials (25.8 per cent), industrials (24.3 per cent) and consumer services (20.8 per cent).
The fund has a current yield of 2.5 per cent, is not geared and has a clean ongoing charges figure (OCF) of 0.96 per cent.
VinaCapital Vietnam Opportunity
Tony Yousefian, investment company research specialist at FundCalibre, suggests the VinaCapital Vietnam Opportunity investment trust, which is on a discount of 23.2 per cent.
“If you want something a bit more exotic more specialist trusts tend to trade at much bigger discounts,” the analyst said.
“VinaCapital run the Vietnam Opportunities investment trust which is London-listed but has its underlying assets in Vietnam and historically has been running discounts to NAV somewhere north of 50 per cent.”
The fund has had a particularly strong year in part thanks the significant reduction of the discount to NAV, which has almost halved, but Yousefian sees further potential for the region.
Performance of trust over 1yr
Source: FE Analytics
“Vietnam – if you take a closer look at what they are doing in the country and the liberalisation of the capital markets that the government is undertaking and the relative stability of the political situation in Vietnam – is the next big exporting region,” he said.
“I am sticking my neck out a bit but it is the next big exporting story for us all to look out for. In the 1960s, 70s and early 80s it was Japan. Then it was China, then it was India and the next big story is likely to be Vietnam.
“Now for that particular trust the discount has closed up massively to somewhere around 23 per cent at the moment and most of that has been done in the last year.
“But if the program that the government has in mind in terms of the capital market liberalisation and their economic development does take shape the way they are planning then we could easily see that particular investment trust close even further.
“If things do go as well as expected then it is not beyond the realms of possibility that that particular trust would trade at parity or indeed at a small premium.”
The trust, which has no gearing or dividend yield, has an OCF of 3.22 per cent including performance fees.
Based in the IT Global sector and benchmarked against the FTSE All Share, Tony Yarrow, fund manager at Wise Investment suggests Caledonia Investments as a discounted fund with the potential to close the gap.
“There is a number that I could choose but the one that springs to mind is Caledonia Investments,” he said.
“Most brokers will – when they look at investment trust discounts or premiums – they look back to what the discount or premium was a year ago and they compare today’s level to that.
“Any broker who did that looking at Caledonia would see they were at a 21 to 22 per cent discount a year ago and they are now only at a 16 per cent discount so therefore they are expensive.
“We would say that the trust that to us is the most like Caledonia is RIT Capital Partners which always trades at a premium and we think that Caledonia is obviously not as cheap as it was a year ago but at 16 per cent it looks very attractive to us still.”
The £2.7bn, five crown-rated RIT Capital Partners is based in the IT Flexible Investment sector and is on a premium of 4.6 per cent, while Caledonia is in the IT Global sector and is on a discount of 16.5 per cent.
While Caledonia is more of a pure equity investment it splits its resources between funds, both public and private equity, and has 12 per cent in ‘other’ assets, giving it a more multi-asset look.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
Over the last five years Caledonia has performed well, outperforming the FTSE All Share and IT Global sectors though over a 10-year timeframe it has struggled.
The £1.8bn fund is not geared, has a yield of 1.9 per cent and an OCF of 1.09 per cent, according to the latest figures from the AIC.