For this reason, at least some of us start twitching when we see bombed-out investment trusts on huge discounts – that 67 per cent mark-down gaping like a ravenous animal’s jaw ready to be stuffed with money.
But it is a seductive idea: investing in something that costs 1p a share and selling it at 40p, making returns of which even the hedgies would be jealous.
Monica Tepes, investment companies analyst at Cantor Fitzgerald, points to the CQS Rig Finance trust as an example of one that came back from the dead.
The trust invests in the debt used to finance the construction of oil rigs and other equipment used in offshore oil and gas production.
"It came to the market when this strategy seemed safe and was 100 per cent geared; then the price of oil collapsed and they had some difficulties," she said. "It was the gearing that caused the problems and at one point they had negative NAV (net asset value)."
"If you had invested at the worst time, you probably would have made 30 or 40 times your money back. The shares were trading at 1p and now they are at 35p."
She suggests that very few people would have had the stomach to invest at the bottom, however, when the fund had lost more than 97 per cent of its value in a couple of years.
Gearing – or borrowing money to invest with the hope of enhancing returns – is a major problem for investment trusts and one of the reasons why they find themselves trading at distressed levels, Tepes (pictured) explains.
"If it comes up for re-financing and they cannot pay, they’re in trouble," she said. This means investors looking for value in wide discounts need to find evidence of a balance sheet that allows the trust to ride out the storm in the wider market.
"The biggest risk you run is the balance sheet risk," she said. "You can have assets that sell off and come back, but the risk is, however, that if there’s gearing and they need to pay or they’re at risk of breaching their covenants, they are forced to sell assets in a distressed market."
Another fund that got caught out in this way was Candover.
"It got caught out at the top of the market in risky, high-beta businesses with a geared portfolio and they were forced to liquidate," Tepes explained.
Ewan Lovett-Turner, investment companies analyst at Numis, says that it is also prudent to look at the underlying asset itself.
"The key thing to get your head around is whether you are looking at a discount to real assets," he explained.
"In those cases, if you are getting a 20 per cent discount to real assets, historically you have done pretty well."
"You have to look out if you are buying more esoteric asset classes or those in which valuations are suspect, like emerging markets, property, or private equity, where the discount reflects that realising these assets is very difficult and you may have to take a hit on the valuation of these investments."
"That’s when the discount isn’t so much of an opportunity."
"They’re the ones where you have to be more careful. Of the funds launched in 2006/2007, there were quite a lot of esoteric property funds that were hit by the financial crisis and went on to wide discounts. A number of these are still working their way out."
"But if you are confident you have a decent discount to real assets, if you have a manager with a long-term track record who is in an asset class that is out of favour, or if you have got a specialist asset class that is out of favour, there you could end up with attractive investments."
Tepes points out that even in a sector such as property there can be opportunities. The UK Commercial Property trust is currently trading on a 12.3 per cent premium, quite a reversal considering it was on a discount of more than 30 per cent after the financial crisis caused a sharp fall in the valuation of UK property.
If you had been brave, daring or lucky enough to buy into the trust in April 2009 you would have made more than 70 per cent on your initial investment by now.
Performance of trust since Apr 2009
Source: FE Analytics
Lovett-Turner says that private equity is an example of an asset class that has seen just such a turnaround in sentiment across the board most recently.
"Private equity has played out like that since the beginning of this year and it’s one we were shouting about for a couple of years."
"The funds were the one standout area of value over the last year or so. We had a recovery in the earnings of the underlying companies. These are a leveraged play on recovery."
Discounts on investment trusts have, broadly speaking, tightened over the past year as the stock markets have risen.
For this reason both Tepes and Lovett-Turner say there are few examples of value still out there. The trusts on the widest discounts are particularly unappealing.
According to the AIC, the trust on the widest discount is Ukraine Opportunity, which now has a tiny market cap of £9.7m thanks to a 54.4 per cent discount. It invests in unquoted investments in Ukraine, the value of which are exceptionally difficult to understand.
International Oil & Gas Technology, on a 53 per cent discount, is just as unappealing, investing in unquoted small cap oil and gas stocks. Tepes points out that the largest holding makes up 65 per cent of the fund and the second largest 25 per cent, meaning it is exceptionally concentrated to boot.
She says that ultimately investors will be better off looking to where the professionals find value and trying to invest alongside them.
There are two funds – Damille and Damille 2 – that look for value in bombed-out trusts, investing in companies that seem beyond repair and encouraging them to sell assets and distribute the gains to shareholders.
"These guys look for funds that have cash on the balance sheet and try to stop that cash being spent, trying to get the funds realising assets and cash."
"They will look at the underlying assets and work out what they think is realisable value for those assets."
"This is their day job. It’s not the kind of thing a private investor would be able to do. If you found them investing alongside you, you would be pretty happy."
