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.

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.

REIT stuff

Today the trust has published its full-year results to 31 December 2017 and the market is quietly satisfied, with the share price up 1.72% at time of writing. It delivered a total return of 15.2%, up an impressive 58.3% on last year’s 9.6p, beating its target of 9% a year over the medium term. EPRA net asset value per share increased 10.3% to 142.24p, while dividends totalled 6.4p per share, in line with its target. This is a modest 3.2% rise on last year’s 6.2p.

Profit before tax rose 169.6% to £247.8m with the contracted annual rent roll up 26.2% to £125.95m. The group now has a market capitalisation of £2.03bn, with its portfolio independently valued at £2.61bn, spread across 46 assets plus 114 acres of strategic land.

Big and Boxy

Tritax raised £350m of equity through a substantially oversubscribed share issue and continues to expand, acquiring 11 big boxes during the year with an aggregate purchase price of £434.99m, further diversifying the portfolio by geography and tenant.

This is a company that even sees a bright side to Brexit uncertainty, as chairman Richard Jewson pointed out: “Brexit may provide a silver lining, since with increased border controls our customers will require more warehousing domestically, further supporting our business case.”

Last month Paul Summers highlighted the stock for those wanting solid dividend income, and it is hard to disagree after today’s update. The forecast yield is currently 4.8%, historic yield 4.56%. The investment trust is still trading at a premium of 7%, which makes me slightly uncomfortable, but that is also evidence of investor demand, as is the premium forward valuation of 18.6 times earnings.

Mid-cap marvel

If you prefer to buy your investment trusts when they are trading at a discount, as most are, you might like to consider Mercantile Investment Trust (LSE: MRC). The £2bn trust, run by JP Morgan, has a fine historic pedigree, having been established in 1884. It targets medium and smaller UK companies outside the FTSE 100 and is up 19% in the last 12 months, and 90% over five years, according to Trustnet.com. My Foolish colleague Peter Stephens is particularly excited by its prospects.

Fund manager Guy Anderson looks for companies that have significant room for growth and are not recognised by other investors. 2017 was a very good year for mid-caps, although lately 2018 has not been as good, something that could be said for global stock markets as a whole.

Trust me

The trust offers broad diversification, with its largest holding, Bellway, making up just 2.5% of the portfolio. Other top holdings such as Man Group, Intermediate Capital, Spirax Sarco, Sophos and Jupiter Fund Management should give you a flavour of its portfolio. It pays quarterly dividends which it aims to grow at least in line with inflation. Currently it yields 2.21%. The growth is the thing, though. It may complement Tritax’s steady dividend flow quite nicely.

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Harvey Jones has no position in any of the 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.

Trust this

The Mercantile Investment Trust (LSE: MRC) reported its results for the six months to 31 July today and gladdened loyal investors with a 16.2% return on net assets, beating 10.7% on the company’s benchmark index. The return to shareholders was 14.5%, as the discount at which the shares trade widened slightly over the half year. It also paid a total dividend of 21p, up from 20.5p in 2016.

Mercantile is managed by JP Morgan and aims to achieve capital growth through a portfolio of UK medium and small company stocks. Long-term performance has been solid, it has returned 120% over the past five years, according to figures from Trustnet.com, and 23% over 12 months. Gearing is relatively modest at 3%.

Cheap and cheerful

Management invests across a spread of sectors but with a tilt towards financial services, where its position in private equity investor 3i performed notably well. It wisely minimised its exposure to the troubled oil services sector. There is plenty of concern about the state of the UK economy but the trust’s joint managers remain relatively positive. “The economy is proving to be more resilient than had been expected and monetary policy has been accommodating. These factors combined should provide a positive backdrop for equities.”

Mercantile, which now manages a hefty £1.66bn, currently trades at a discount of 9.86%, which I find reassuring as I dislike buying trusts at a premium to net asset value. Ongoing fund charges total just 0.5% a year, and the current yield is 2.32%. Investing in this trust could prove good business.

Go Nimmo

Standard Life UK Smaller Companies Trust (LSE: SLS) is another long-standing investor favourite, and this £310m investment trust has also performed smartly, returning 29% over 12 months, and 115% over five years. That comes as no surprise when you discover it is run by smaller companies whizz Harry Nimmo, who was renowned when I first started writing about investment trusts 15 years ago, and has been running this one since 2003.

Nimmo’s biggest holding right now is Foolish favourite Fevertree Drinks, which makes up 5% of his portfolio, and has more than justified its place with its fizzy recent performance. Some 10% of the portfolio is invested in the FTSE 250, with the remainder split between the Numis Smaller Companies index and AIM. The yield is just 1.48%, more than you might expect on a smaller companies fund, but charges are higher than on Mercantile, with a total expense ratio of 1.17% a year. So far, Nimmo has been worth the money.

Think small

The trust trades at a discount of -5.43% to net asset value. Personally, I wouldn’t have been surprised if it traded at a premium, given Nimmo’s reputation. If buying individual smaller companies stocks is too risky for you, either of these trusts could do the job very nicely on your behalf. Small is beautiful

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Harvey Jones no position in any of the 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.

Impressive performance

Rising by 128% in the last five years is the Mercantile Investment Trust (LSE: MRC). It focuses on mid and small-cap UK stocks, and they could help it to deliver impressive returns in future. One reason for this is the uncertainty surrounding the UK economy. With Brexit causing consumer and business confidence to come under pressure following a spike in inflation, many investors are focusing to a greater extent on larger, more internationally-exposed companies. This could mean their smaller peers offer wider margins of safety at the present time.

The company’s performance puts it in the top quartile of its sector over the last three years. Despite its strong performance, it continues to trade at a 10% discount to its NAV. This suggests there could be even greater capital growth potential on offer. It also has a dividend yield of 2.3%, which is only 30 basis points lower than inflation at the present time. The trust aims to keep dividend growth as close to inflation as possible in the long run, which could make it of interest to income investors.

However, the main focus of the Mercantile Investment Trust is capital growth. Holdings such as Bellway, Auto Trader and Just Eat mean that it has the potential to deliver further outperformance of the FTSE 100 in the next five years.

Value focus

Also offering upside potential in the long run is the Jupiter UK Growth Investment Trust (LSE: JUKG). It has delivered a total return of 69% during the last five years. This puts it well ahead of the FTSE 100’s performance during the same time period. Despite this, it trades at a 3% discount to its NAV and this indicates it could offer further upside over the medium term.

The trust has a number of value opportunities within its major holdings. For example, its top 10 holdings include companies such as Lloyds and Barclays – both of which trade on relatively low price-to-earnings ratios.

Similarly, stocks such as Taylor Wimpey and IAG could deliver long-term growth because of low valuations which have been brought about by uncertain market conditions. And with a number of smaller companies included within its holdings, the trust has exposure to potentially fast-growing areas, too. Therefore, it could deliver further outperformance of the FTSE 100 in the long run.

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Peter Stephens owns shares in Lloyds, Barclays and Taylor Wimpey. The Motley Fool UK has recommended Auto Trader, Barclays, Just Eat, and Lloyds Banking Group. 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.

As investment trusts are traded like shares, their shares can trade at a premium or discount to the value of their assets. Demand and supply factors determine the value of the shares in investment trusts, and this usually means trusts that have been underperforming the sector usually trade at a discount to its net asset value (NAV). On the other hand, a strongly performing trust is likely to trade at a premium to its NAV.

Buying investment trusts that are trading at a discount to their NAV can be regarded as a bargain, as you are purchasing a collection of assets for less than the sum of its parts. But there is no guarantee that the discount will close and a sizeable discount could be regarded as a warning sign for poor management, excessive fees or lacklustre investment performances.

We will now look at whether it would be wise to invest in these five heavily discounted investment trusts.

Alliance Trust (LSE: ATST), the globally-focused investment trust, has been trading at a discount of more than 5% for a number of years now. With an investment return of just 1.4% in the first half of 2015, its recent performance has been underperforming its peers.

But management seems to be finally getting their act together. It has engaged with an activist hedge fund Elliott Advisors to tackle its bloated cost structure and improve its performance by increasing its share of equity investments.

The trust could take action to shrink its discount, by buying back shares in itself on the open market to reduce the discount in its shares. It did just that in 2011, when it bought back some £350 million worth of its own shares. With pressure from an activist investor, a return to share buybacks is quite likely.

Mercantile Investment Trust (LSE: MRC) is a UK-focused equity investment trust that has a long history of outperforming the sector. In the past year alone, the investment trust delivered a 20.9% after fees return on its NAV, which compares favourably to the peer average of 17.0% and the FTSE All Share total return of 5.0%. With an ongoing annual charge of just 0.50%, its 11.2% discount seems unjustified.

Templeton Emerging Markets Investment Trust (LSE: TEM) is one of the most popular emerging market investment trusts on the market, with assets under management totalling £1.63 billion. Unfortunately, its heavy exposure to China and Brazil has meant its investment performance has lagged its peer average in recent years.

Caledonia Investments (LSE: CLDN) has a significant proportion of its assets in private unquoted companies through direct holdings and private equity funds. Because of its heavy exposures to the UK, the rest of Europe and Asia, its investment performance has lagged the sector average. On top of this, it has a very high ongoing annual management charge of 2.61%.

Fidelity China Special Situations (LSE: FCSS) trades at a very substantial discount to its NAV, as the recent volatility in the Chinese equity markets and sell-off in emerging markets has reduced demand for the trust. As volatility settles down in China’s equity markets, the trust’s discount could narrow to its historical average of around 10%.

More information?

The Association of Investment Companies (AIC) publishes a wide range of data about investment trusts, including the premium/discount that they trade at, the amount of gearing used and their ongoing charges. Click here to see its latest published statistics.

The post 5 Investment Trusts Trading At Discounts Of Over 10%: Alliance Trust plc, Mercantile Investment Trust plc, Templeton Emerging Markets Inv Trust plc, Caledonia Investments plc & Fidelity China Special Situations plc appeared first on The Motley Fool UK.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.