According to Numis data, the average investment trust traded at a 13% discount to net asset value (NAV) in 2022 – a level not witnessed consistently since the 2008 global financial crisis.

While discounts can present an enticing opportunity for eagle-eyed investors, we are careful not to base our entire investment case around pricing. Instead, we seek out investment trusts with the ability to generate strong total returns that have been unfairly derated by the market, and identify potential catalysts that could lead to a narrowing of their discounts.

By focusing on overlooked areas of the market, this contrarian approach can not only result in a generous upside, but it also offers an uncorrelated source of returns that can protect portfolios against wider market volatility. Rarely has there been so much potential to capitalise on pricing discrepancies in the investment trust universe, and below we highlight two themes we are closely following.

Green energy giveaway

One sector in which trust discounts have caught our eye is renewables. While many of the investment companies operating in the space were recently trading at sizeable premiums, rising gilt yields and the announcement of a revenue cap for renewable energy generators saw the sector endure steep declines last year. We believe this merely represents a short-term share price fluctuation, as the structural trends driving long-term growth in renewables remain robust.

One trust we invested in recently is Aquila European Renewables (AERS ), an operator of wind and solar assets deployed across Iberia, Greece and Scandinavia. As is the case with many trusts managed from overseas, Aquila is relatively unknown in the UK, which has contributed to its 15% discount.

Analysis also revealed the asset life assumptions of the trust’s portfolio – the length of time before the cost to repair an asset outweighs its potential investment returns – are much shorter than rivals’. If the managers can align with the rest of the sector on this metric, the share price should benefit. We like the multiple catalysts for change and long-term structural growth potential on offer here.

Japan’s shareholder revolution

Another overlooked market we have invested in recently is Japan, where a surge in shareholder activism is reinvigorating the region’s dated corporate culture. In particular, the country’s cash-rich but low-yielding businesses are proving fertile ground for change. Since 2019, there has been a steady increase in activist events, share buybacks and takeovers in an effort to improve profits for investors.

Despite the resultant increase in shareholder returns across the board, Japanese companies – particularly at the smaller end of the spectrum – continue to trade on much lower multiples than international peers. While this creates an attractive entry point, alpha-driven investors can go one step further by seeking out the activist managers unlocking the country’s value.

Nippon Active Value (NAVF ) targets undervalued, yet promising, smaller Japanese companies that have accumulated large cash reserves. The team engages with company boards, encouraging them to implement more progressive business practices, for example granting managers equity in the business. This way, the trust can encourage better alignment of interests between management teams and shareholders – and, crucially, improve returns. The trust currently trades at a 6% discount and enjoys strong growth prospects through its focus on turnaround situations.

These are just two examples of the many investment themes emerging in the overlooked corners of the investment trust world. Given the advantages offered by MIGO’s closed-ended structure, and notably our ability to be patient in the face of share price volatility, we stand ready to seize these opportunities, offering investors an exclusive one-stop-shop for special situations in the investment trust universe.

Nick Greenwood is manager of MIGO Opportunities (MIGO ) investment trust.

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