The genuine bargains in the investment-trust sector

Everybody loves a bargain. The investment-trust sector appears to offer one of the best bargains available to investors: trusts whose shares trade at a significant discount to net asset value (NAV), the value of the underlying portfolio. These offer investors the prospect of enhanced returns as discounts to NAV narrow.

If you buy a trust on a 15% discount to NAV, and the discount disappears as the price rises to par, you have made 15% before capital gains or dividends on the underlying portfolio of assets. A discount to NAV offers downside protection too, as there is limited scope for the discount to widen further. Looking for trusts trading at an anomalously high discount is eternally popular. But does the strategy actually work?

Not as well as people think. Discounts can always widen further, although that should prompt the directors to take action. They can either buy back shares at a discount, thereby adding value for remaining shareholders, or switch