Buying a good investment trust on a double-digit discount is a prudent strategy for some who wish to not only benefit from growing underlying assets but also hope for a re-rating by investors.
This can double the chances an investor has of success and lead to superior gains in the long-term if the right vehicle is chosen.
However, not all trusts on double-digit discounts are guaranteed to be re-rated and may well be at a natural level for the asset class or the performance of the portfolio.
Below, FE Trustnet looks at those investment companies on double-digit discounts that within one percentage point of their five-year average. All data is from the Association of Investment Companies (AIC) and is to month-end, with June 2018 as the final month.
Previously, we have looked at the sectors that are on a wider discount or premium relative to their five-year history, the trusts that currently sit on a tighter premium or wider discount relative to their peak over the last five years and the investment trusts that currently sit on a tighter premium or wider discount relative to their five-year peak.
The investment company on the largest discount on our list is below Caledonia Investments, which sits in the IT Global sector.
The £1.9bn trust invests in proven, well-managed businesses that can generate both positive capital growth as well as improving income.
Performance of trust vs sector and benchmark over 10yrs
Source: FE Analytics
The portfolio invests in both quoted and unquoted companies and has a 34 per cent weighting to the UK, 27 per cent to the US and 15 per cent in Asia.
Over the past five years it has been a second-quartile performer, returning 75.78 per cent, although over 10 years it has been the second-worst in the sector.
The trust is currently trading at a 17.47 per cent discount to its net asset value (NAV) although over the past five years it has averaged a discount of 18.1 per cent, meaning it is actually only 63 basis points narrower than its recent historical norm.
Caledonia Investments, which is not geared, has a yield of 2 per cent and ongoing charges of 1.22 per cent, according to the AIC.
The second-largest discount on the list comes from the £162m Artemis Alpha Trust, managed by John Dodd, Adrian Paterson and Kartik Kumar.
On a 17.4 per cent discount to NAV, the closed-end fund’s discount has averaged at 16.48 per cent over the past five years, meaning it is trading just 92 basis points wider.
The trust, which sits in the IT UK All Companies sector, has been the second-worst performer in the sector over the past five years, returning 37.49 per cent to investors.
In comparison, the average sector peer produced gains of 61.89 per cent while the FTSE All Share benchmark was up by 52.76 per cent.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
The investment trust is largely focused on small and medium-sized companies and is currently overweight financials and consumer services stocks.
It has a 1.9 per cent dividend yield, is 4 per cent geared and has ongoing charges of 0.91 per cent.
Fidelity China Special Situations is a country-specific trust that makes the list. It has been run by Dale Nicholls since January 2014 when he took over from Anthony Bolton.
The trust had been on a single-digit discount when he took over but widened out to double digits when he took charge.
Since then, the Chinese equity market has been up-and-down, particularly through 2015 and 2016 when fears of a slowdown and the devaluation of the currency spooked markets.
It has remained level over the last couple of years and the discount has settled back down and remains around the five-year average of 12.79 per cent.
Fidelity China Special Situations is on a 12.96 per cent discount and is 27 per cent geared. It has a yield of 1.5 per cent and ongoing charges of 1.12 per cent.
Another emerging market country specialist, JP Morgan Russian Securities, also makes the list. It is another that has gone through a tumultuous last few years.
The market, which is correlated to oil prices to a large extent, suffered when the spot price collapsed but has been a strong performer in recent years when prices bounced back.
Table of trusts on double-digit discounts <1 percentage point away from their 5yr average
Source: AIC
Overall there are four Asia Pacific ex Japan trusts, which again will have been impacted not only by the sentiment towards China, but more recently the narrative surrounding a potential trade war.
JPMorgan Smaller Companies, JPMorgan Japan Smaller Companies and TR European Growth are the small-cap specialists who make the list.
In Europe, The European Investment Trust is the lone trust from the region on the list, although Baring Emerging Europe, which focuses on European emerging markets trust has also traded at a double-digit discount for much of the past five years. Aberdeen Emerging Markets rounds out the list.