Can these discounted investment trusts help you to achieve financial independence?
When an investment trust trades at a discount to its net asset value (NAV), investors can effectively purchase a portfolio of assets for less than the sum of its parts. Although, some investment trusts deserve to trade at a discount because of concerns about poor management or excessive fees, I reckon these three trusts may be worth a closer look.
The BlackRock Throgmorton Trust(LSE: THRG) is classic case of a well-run investment trust going cheap right now. Over the past five years, this fund has produced a total return of 165% for investors, which compares favourably to the UK smaller companies benchmark performance of 148%.
Run by Mike Prentis and Dan Whitestone, who have been managing the fund together since 2008, it invests primarily in small- and mid-cap stocks listed on the London Stock Exchange. The top five holdings at the end of April included CVS Group, JD Sports Fashion, 4imprint Group, Dechra Pharmaceuticals and Cineworld Holdings.
The fund has a NAV of 513p per share, but trades at a price of just 429p. This indicates a discount of 16.4%, which seems unwarranted given the liquidity of its assets and its historic outperformance.
With a low total ongoing charge of just 0.54%, Foreign & Colonial Investment Trust (LSE: FRCL) could be a savvy way to gain international exposure at a reasonable cost.
The fund's discount may be more modest, at just 7%, but investors would benefit from the fund's diversification, both in geographical terms and across different industries. This offers investors some downside protection from country- or industry-specific risks, which may lead to significant outperformance in the long run.
Foreign & Colonial is cautiously managed, with no single equity investment currently representing more than 2% of its total assets. The US is the top country exposure in the portfolio, with 38.8% of its total assets at the end of June (up from 35% in June 2013). Other sizeable exposure is to the UK, with 12.6% (down from the 29% it represented four years ago), followed by Japan, Ireland and Germany.
The last investment trust worth mentioning is Standard Life Private Equity Trust (LSE: SLPE), which currently trades at a discount to NAV of 16.2%.
Private equity has been one of the fastest-growing and best-performing alternative asset class in recent years, but it is often closed off to retail investors. Investment trusts, such as this one therefore give retail investors rare access to an opportunity to generate higher absolute returns while improving portfolio diversification.
What's unique about private equity funds is that they typically invest in unquoted companies that are in the developing stage or have under-tapped potential. The Standard Life fund holds a diversified portfolio of private equity funds, with a majority focused on European companies.
There is at least one major downside though. Fees can be quite expensive -- last year, the fund had an AIC ongoing charge of 2.33% when performance fees were included. Nevertheless, the fund still managed to deliver a total return performance of 161% over the past five years.
Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.