Eight bargain investment trusts that could bring YOU returns of up to 90% over five years

Some investment trusts are as cheap as chips right now, says our investing expert Jeff Prestridge – and that presents a buying opportunity for the brave.

With share prices weighed down by poor sentiment, this means that in years ahead when the modd improves there is a strong chance they will bounce back.

With these investment trusts you can buy into quality companies for less than their market price, Jeff explains what you need to know – and how to profit.

Investing some of your hard-earned money in a portfolio of stock market-listed investment trusts makes sense on so many levels. 

Provided you bat cleverly when you pick your trusts, you can obtain exposure to some of the world’s most compelling equity markets and asset classes – and over the long term potentially improve your wealth.

Even better, shelter them in an Individual Savings Account (Isa) and you can watch your portfolio build tax-free – a smart move given we have a Labour Government waiting on the horizon to tax the middle classes until the pips squeak.

Although investing is never without risk, we (the western world) are on the cusp of better economic times. Inflation is coming down (2 per cent in the UK) and while the Bank of England held off cutting interest rates on Thursday, lower interest rates – like Labour – are coming. 

When they arrive here, right across Europe and in the United States, they will provide the ideal backdrop for economic growth to prosper. Stock markets feed off such conditions.

Yet there is one other factor that makes the case for investment trusts so compelling – many are as cheap as chips.

Their share prices are seriously suppressed – a result of many factors, including general negativity towards the UK stock market. 

This means that in the years ahead, as economic and corporate conditions improve, many well-run trusts with convincing investment mandates have the potential to fizz like champagne.

This cheapness shows itself in share prices that do not reflect the value of their underlying assets.

To use a little bit of investment jargon, these trusts sit on big discounts.

In layperson’s terms, this provides an opportunity for an investor to gain a slice of a trust’s holdings for less than they are worth.

In shopping terms, it’s what’s called a bargain.

‘It’s very much a buyer’s market for investment trusts,’ says Jason Hollands, managing director of investing platform Bestinvest, part of wealth manager Evelyn Partners. 

‘Trusts can be found that are sitting at big discounts across all the industry’s key investment sectors. Indeed, in 18 of the 32 sectors, average discounts are in double digits.

‘While investors should exercise a degree of caution, opportunities abound for shrewd buyers.’

Of course, discounted trust prices provide fizz to an investment portfolio only if they then narrow, accelerating overall returns for investors. 

While the future cannot be predicted, Annabel Brodie-Smith, communications director at the Association of Investment Companies (the trust sector’s cheerleader), says: ‘History shows that discounts don’t hang around for long’. When they do narrow, she adds, the performance lift can be striking.

Discounts this deep have led to 90% future returns 

According to its research, investing when the average share price discount is over ten per cent has led to powerful returns in the subsequent five years.

Analysing 128 five-year periods since June 2008, the AIC’s research showed that when the average discount exceeded ten per cent, the average investment trust generated a return of 89.3 per cent over the following five years. When it was less than five per cent, the return was 56.1 per cent.

For the record, the average trust discount is currently 14.5 per cent.

Of course, these numbers analyse the past, not the future, but the portents are good.

Also, as Hollands warns, trust buyers need to be savvy when chasing discounts – trust selection is all important. ‘The key,’ he says, ‘is to buy well-managed trusts that are investing in markets or asset classes with a positive outlook – and which can be snapped up at a modest discount.’

So which trusts fit this brief? Wealth & Personal Finance asked a panel of experts to identify trusts that are currently sitting at an attractive discount and which could (yes, could, not will) go on to deliver respectable long-term returns.

Six of the eight are trading at double-digit discounts – and seven are above their average for the past five years (the exception is Polar Capital Technology).

These are not investment recommendations, but ideas for you to mull over. All of them can be bought easily via an investment platform and squirrelled away inside a tax-friendly Isa.

In the current tax year, the maximum permitted investment in an Isa is £20,000, although the Labour Party may well fiddle with this limit when it launches its expected assault on our ability to build long-term wealth.

1 Aberforth Smaller Companies (11.1% discount)

Investment experts believe that a combination of future lower interest rates and subdued inflation spell good news for small and mid-cap UK listed companies.

Dan Coatsworth, investment analyst at wealth manager AJ Bell, says that Aberforth Smaller Companies is an ‘expert in finding opportunities among UK smaller companies’.

He adds: ‘Investors certainly get diversification. It’s not often you see an investment vehicle providing exposure to a houmous manufacturer, gold miner, annuity provider, van rental group and an estate agent.

‘But that’s what you get with Aberforth via respective holdings in Bakkavor, Centamin, Just Group, Zigup and Foxtons.’

Some of its other 78 portfolio holdings include pub chain Mitchells & Butlers and Card Factory.

Five-year returns are 43 per cent and annual charges are a shade short of 0.8 per cent.

Last year it paid shareholders dividends of 50.5p a share. The shares closed on Friday at £15.10.

2 Utilico Emerging Markets (18%)

This £418 million trust, which featured in Wealth & Personal Finance on June 2, delivers shareholders a mix of dividend and capital return.

It does this by taking stakes in businesses that develop or run the infrastructure necessary for the world’s developing economies to keep growing. It is a differentiated approach which Alex Watts at investing platform Interactive Investor says could appeal to ‘adventurous investors’.

Watts, a fund analyst, says the trust has an experienced fund manager in Charles Jillings (founder of investment company ICM), has less of a focus on big emerging markets such as India and China than rival trusts, and pays out a stable dividend.

Importantly, he says ‘valuations across emerging markets look cheap on both a historic basis and when compared with markets such as the United States’.

Over the past five years the trust has delivered returns of 11.5 per cent – slightly less than its peer group (27.5 per cent).

Last year’s dividend was 8.6p a share, with the trust’s shares closing Friday at £2.19.

3 Templeton Emerging Markets (14.8%)

Bestinvest’s Hollands says this is another attractively priced emerging markets trust.

Established 35 years ago, Hollands describes this £1.7 billion trust as the ‘granddaddy’ of emerging markets investing and a ‘solid option for investors wanting exposure to developing economies’. Run by Chetan Sehgal, the trust has a big focus on Asia with some familiar names among its biggest holdings: Taiwan Semiconductor Manufacturing Company, Samsung and ICICI Bank.

Its exposure to China explains subdued performance over the past five years (18.7 per cent). But with China’s stock market now stabilising, Hollands says TEMIT could potentially flourish. Ongoing annual charges are 0.97 per cent. In the last financial year it paid dividends of 5p a share. The shares closed on Friday at £1.61.

4 Polar Capital Technology (6%)

Although this trust has a stellar performance record – five-year returns of 161 per cent – its shares trade at a 6 per cent discount to the value of its assets.

AJ Bell’s Coatsworth says the £4.1 billion fund represents a ‘way of buying on the cheap access to hot tech themes such as artificial intelligence, semiconductors, data centres and digital advertising’. Among top holdings are stakes in Nvidia (10.4 per cent), Microsoft, Meta and Apple.

Coatsworth adds: ‘As the global economy picks up, both consumers and businesses could increase their spending on tech. That indicates the tech giants could keep growing earnings at a rapid pace. Of course, there is no guarantee this will happen.’

Shares are priced at £34 and ongoing annual charges are 0.81 per cent.

5 Impax Environmental Markets (9.4%)

This £1 billion trust invests in global businesses that derive a majority of their revenues from providing solutions to environmental issues – for example, clean energy and sustainable agriculture. Bestinvest’s Hollands says the trust should ‘appeal to green investors looking for a bargain’.

Five-year returns are 35.2 per cent and annual charges are 0.83 per cent.

Last year’s dividend was 4.6p and the shares are priced at £3.92.

6 Greencoat UK Wind (15.9%)

Another cheap fund with a green focus – investing in UK onshore and offshore wind farms.

Victoria Hasler, head of fund research at investing platform Hargreaves Lansdown, says this income-focused trust was hit hard by the rise in UK interest rates that began in December 2021.

This made its income less attractive to investors, causing the shares to trade at a sizeable discount. But with rates heading down, and a political desire to make the UK self-sufficient in energy, she says renewable energy generation has a ‘clear tailwind’ – and Greencoat UK Wind could benefit. She adds: ‘With an annual dividend yield of 7.45 per cent, now seems like an attractive entry point for investors.’ Dividends paid last year were 10p and the first quarterly payment for this year is 2.5p. The shares trade at £1.35.

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7 Invesco Global Equity Income (14.3%)

Fourteen years of dividend growth underpins this £174 million trust. AJ Bell’s Coatsworth says it could appeal to ‘retirees who want to keep growing their investments while also generating an income’.

‘The annual dividend yield of 2.7 per cent may not look attractive when compared to income returns from cash,’ he adds, ‘but the trust is all about the potential for mixing capital gains with income.’

Five-year overall returns of 60 per cent support Coatsworth’s argument. Ongoing charges are 0.82 per cent.

The trust has nearly half of its assets in the United States. Its biggest holding is in UK venture capital company 3i.

8 European Opportunities Trust (11.5%)

Managed by Devon Equity Management, this £575 million trust invests in European equities.

Although its five-year record is indifferent when compared with its European peer group (3.9 per cent versus 49.5 per cent), Darius McDermott of Chelsea Financial Services says the manager, Alexander Darwall, has developed ‘an investment process over the past two decades that has resulted in a record of success in different economic environments’.

He adds: ‘We see no reason why he cannot continue this success going forward.’

The trust has had a better past year, a return of 13 per cent, and late last year survived a continuation vote.

Activist shareholders, most notably Saba Capital, will continue to put pressure on Darwall to improve the trust’s performance and shrink the discount.

Ongoing annual charges are 1.02 per cent. Dividends were 3.5p a share in the last financial year against a share price of £8.81.