Gearing and discounts are the two worries most frequently raised by investors and advisers, and some trusts have addressed these issues to make themselves less intimidating.
Here FE Trustnet looks at some top-performing trusts that offer a safer way for investors to get closed-ended funds into their ISA.
Personal Assets Trust
Kieran Drake, investment trust analyst at Winterflood Securities, is a fan of FE Alpha Manager Sebastian Lyon’s £534m Personal Assets Trust.
"The fund operates a discount/premium control policy which is designed to help the fund’s shares trade at a price close to the NAV," he said.
"If a discount opens up then shares will be bought back and likewise, if a premium opens then shares will be issued."
"In recent times the latter has been prevalent and the fund has grown in size through share issuance on the back of solid performance."
"After issuing new shares worth more than £120m in 2012, the fund currently has around £550m in assets under management."
The trust has outperformed both its IT Global Growth sector and the FTSE All Share benchmark over three years, according to data from FE Analytics, making 30.95 per cent in that time.
Performance of trust vs sector and benchmark over 3yrs
Source: FE Analytics
Lyon’s trust made 8.32 per cent in 2011 while the market fell 3.46 per cent, although growth in rising markets has been slow.
Drake said: "The trust has an objective of protecting and growing shareholder capital, with the emphasis on protection."
"The fund takes a defensive approach with around 55 per cent of assets currently invested in government bonds and gold, and the rest in blue chip equities primarily listed in the UK and US."
"We rate the fund’s manager highly and in our view he has done a good job of protecting shareholders’ capital during the market volatility of recent years."
"However, investors should be aware that the price paid for this capital protection is that the fund is likely to underperform in equity market rallies."
The trust has a total expense ratio (TER) of 1.15 per cent, according to data from FE Analytics.
Finsbury Growth & Income
A marginally more aggressive choice is FE Alpha Manager Nick Train’s £259m Finsbury Growth & Income Trust.
The trust has made 329.52 per cent over 10 years, making it the best-performing of the 20 in the IT UK Growth & Income sector.
Over five years it has gained 73.46 per cent, while over three years the returns are 79.97 per cent, according to data from FE Analytics.
Performance of trust vs sector and benchmark over 5-yrs
Source: FE Analytics
This outperformance has led to the trust trading on a premium – meaning the price paid for the trust is greater than the total value of its assets – although a discount-control mechanism remains available to the board if this changes.
"The fund operates an active discount-control mechanism to limit the discount to 5 per cent or less through share buybacks," Drake said.
"However, demand for the fund has been high in the last couple of years, with the fund trading on a premium for most of 2011 and 2012."
According to FE Analytics, the figure is currently 1.39 per cent. Drake explains that the fund is highly concentrated, holding just 26 stocks.
"The manager, Nick Train, looks to buy quality businesses and then hold onto them," he continued. "He focuses on certain sectors within the market: consumer goods and services, technology and financials."
"His investment philosophy is simple and yet highly effective. Given the significant differences between the fund’s portfolio and the benchmark, there will be times when the fund will struggle to outperform."
Although the dividend has more than doubled over the past decade, it still remains low, Drake says, with investors gaining in capital growth relative to their peers.
"We believe that this fund remains attractive on a long-term view for investors looking for total returns from an experienced manager with an excellent record," he said.
The current yield is 2.43 per cent, according to FE Analytics, and the TER is 1 per cent.
Troy Income & Growth
Charles Cade, head of investment companies research at Numis Securities, thinks that for investors with a need for income, Troy Income & Growth fits the bill.
"Whereas Personal Assets Trust takes a conservative, absolute return view, investing in cash and commodities as well as equities, Troy Income & Growth is an equity fund with an income focus."
The trust, headed up by star manager Francis Brooke, also keeps its discount within a narrow band, and is currently trading on a 1.46 per cent premium, according to FE Analytics.
In terms of capital growth, the fund’s performance is unexceptional, with its returns of 44.3 per cent over three years putting it in the third quartile of the IT Global Growth & Income sector.
However, the trust is yielding 3.65 per cent, according to data from FE Analytics. The TER is 1.31 per cent.
Witan Investment Trust
Cade thinks that the Witan Investment Trust should also appeal to investors who are wary about closed-ended funds.
"It’s a multi-manager fund so it has a number of underlying managers, including Nick Train," he said. "It protects its discount and buys back shares to keep it at its current level, so the only real danger is that it will widen further."
Data from FE Analytics shows that the fund is currently on a substantial discount of 13.01 per cent.
"It’s a very diversified portfolio with a decent track record and it only has a little bit of gearing at the moment," said Cade.
"It is 7 per cent geared right now and keeps that figure to under 10 per cent. Most equity trusts are quite conservatively geared and most are under 15 per cent, currently."
The trust is yielding 2.43 per cent and the TER is 1.07 per cent.
Foreign & Colonial IT
Iain Scouller, investment trust analyst at Oriel Securities, says that the lower discount volatility of the Foreign & Colonial Investment Trust makes it more appropriate for retail investors.
The trust has a discount-control mechanism that aims to keep the discount below 10 per cent by buying back shares at lower prices.
Data from FE Analytics shows that the trust has beaten its composite benchmark over three years, returning 26.95 per cent against the index’s 12.75 per cent.
The benchmark is made up of the FTSE All World Europe ex UK, with a weighting of 60 per cent, and the FTSE All Share.
The fund has a TER of 0.92 per cent and is currently yielding 2.45 per cent, according to data from FE Analytics.
FE Crown Ratings are rebalanced biannually and the next time this will happen will be in August 2013. The list of FE Alpha Managers is set to be updated in the first week of February this year.