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2 cheap investment trusts for a starter portfolio

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With the FTSE 100 having risen significantly in recent years, many new investors may be unsure whether now is a good time to buy shares. After all, buying at a low price and selling at a higher one is the aim of investing. And with reduced margins of safety on offer following the bull market since the financial crisis, opportunities to profit may be more limited.

However, a number of investment trusts continue to trade at a discount to their net asset values. This could indicate that they offer good value for money. And since they offer a high level of diversification, they could prove to be worthwhile buys for the long run. Here are two trusts that could be worth a closer look.

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Impressive performance

Reporting on Thursday was internationally-focused business Alliance Trust (LSE: ATST). The company experienced a year of significant change during 2017. Notably, it changed investment manager and implemented a new investment approach. This provides those putting their cash into the company with exposure to a number of global equity managers who are investing in high-conviction ideas.

The trust delivered a total shareholder return of 19.2% during 2017. This compares to the MSCI ACWI total return of 13.8% during the same time period. This is a positive result at a time when global stock markets experienced a bull market. Since the company has exposure to a variety of shares in a number of different regions internationally, it could be set to benefit from further improvements in the outlook for the global economy.

With Alliance Trust trading at a discount of around 6% to its net asset value, it appears to offer good value for money. Since it has a significant amount of diversification and a good track record of growth, it could be a sound purchase for a starter portfolio.

Growth potential

Also offering long-term growth potential is the Mercantile Investment Trust (LSE: MRC). The company is invested solely in UK equities, with its major holdings having a bias towards mid-caps. Historically, mid-caps have outperformed larger companies and are often seen as more volatile and risky, but with higher return potential.

Certainly, investing in FTSE 250 stocks prior to Brexit could be seen as a risky move. In many cases, they are focused on the UK economy and so a further decline in the forecast GDP growth rate could lead to difficult trading conditions for them.

However, with the Mercantile Investment Trust having delivered total returns of 92% in the last five years versus a return of 51% for the UK all companies sector, it has a solid track record of outperformance. Furthermore, since it trades at a discount to net asset value of 9%, it appears to offer good value for money.

While the prospects for UK equities could be uncertain, the reality is that their risk/reward ratios could be enticing due to investors having priced-in potential risks. As such, the trust could be a worthwhile purchase for a starter portfolio.

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Peter Stephens 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.

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