How to profit from the most undervalued investment trusts

Investment trusts have now traded at double-digit discounts for the longest sustained period on record, with the average trust (excluding 3i) currently on a discount of 14% to its net asset value (NAV). The average discount has been wider than 10% since 2022 and many trusts are on discounts that are far wider. Some analysts believe these could now represent historic bargains which investors should seize before the discounts narrow.

Clearly, such a rebound cannot be guaranteed, but we asked some of the country’s leading advisers and analysts to name the one heavily discounted trust that they would pick above all others for its longer-term potential.

Annabel Brodie-Smith, Communications Director at the Association of Investment Companies (AIC), said: “Looking back over the last 30 years, discounts come and go in cycles; there have been extended periods of discounts before and times when assets under management have fallen substantially, but discounts have always narrowed and the investment trust sector has always rebounded. I don’t see any fundamental reason why this time should be different, and therefore many of these discounted trusts could turn out to be bargains for patient investors.

“Investment trust boards are keenly focused on enhancing returns for shareholders and we’ve seen record share buybacks and strategic reviews. There have been lots of mergers and acquisitions and this is likely to continue, which will create exciting opportunities for investors.”

Below are the trusts our experts have selected, along with their rationale.

Andrew Rees, Investment Company Research Analyst at Deutsche Numis, said: “International Public Partnerships is currently trading at a discount of more than 20% to its June 2024 NAV. This does not reflect its value. The diversified portfolio of 140 core infrastructure investments offers long-term, government-backed, largely inflation-linked cashflows, with a high degree of revenue visibility. To this end, the board has previously guided that even if no further investments are made, the company could pay a growing dividend for at least a further 20 years.

“Earlier in February, peer BBGI Global Infrastructure (which has 100% invested in public-private partnerships) was the recipient of a recommended cash bid at a 3% premium to the December NAV. In our view, this highlights the inherent value that can be ascribed to high-quality core infrastructure cashflows, even if this is not currently being reflected by the equity market. The company has repaid its corporate debt and sold selected assets to fund an ongoing share buyback programme, with around £53 million returned to date. Although further volatility could lie ahead, shareholders are currently being compensated for this through a fully covered 7% dividend yield.”

Shavar Halberstadt, Research Analyst at Winterflood Securities, said: “Having been one of the top performing investment trusts over 2024, Seraphim Space (SSIT) remains on a wide discount of 37%. This is despite the fact that its portfolio companies have steadily continued to strike long-term revenue generating partnerships with major government agencies and global corporates. SSIT is one of the few publicly traded ways to attain pure-play access to the space tech theme, which is supported by strong structural tailwinds in terms of rising global defence expenditure and wider investments in the space domain. If the managers’ guidance on portfolio companies achieving positive earnings is maintained, we believe that its prospects are strong and the discount should narrow over the medium term, particularly as IPO volumes normalise.”

Rachel May, Research Analyst at Shore Capital, recommends Baillie Gifford Shin Nippon (BGS) on a discount of 15%. She said: “BGS is now the only trust offering pure exposure to Japanese small caps. The high-growth, small cap nature of its portfolio has caused a significant divergence in performance relative to other Japan trusts at a time when large caps have outperformed. BGS has historically traded at a material premium to its benchmark: however, the portfolio continues to get cheaper with over half the portfolio currently trading on a price-to-sales ratio of 2x or less, despite being expected to generate around 15% earnings growth per annum over the next three years, almost double the MSCI Japan Small Cap index.

“We argue that the extended period of underperformance experienced by BGS is likely to reverse when the trust’s growth strategy comes back into favour, which should trigger a significant rerating of the portfolio and narrowing of the discount which has widened to almost 15%. That compares to a five-year average of just 6%. We also highlight the conditional tender offer for up to 15% of the company’s issued share capital, based on the NAV performance over the three-year period ending 31 January 2027.”

James Burns, Head of Managed Portfolio Service at Evelyn Partners, said: “We have viewed HarbourVest Global Private Equity (HVPE) as a core private equity recommendation as it provides the most diversified and liquid exposure to private markets. HVPE, with a discount of 38%, is effectively a ‘fund of fund of funds’ and the portfolio as a result is the most diversified in its peer group, with well over 1,000 material company holdings (14,000 in total) across strategy, vintage and geography. A key differentiating feature of HVPE versus its peers is its significant allocation to higher risk venture capital and growth equity (30%).

“Whilst the long-term NAV performance has been exceptional versus peers and listed markets, the share price performance has been less impressive and far more volatile. This is a common issue for all the listed peers. In response, the board has recently come out with a series of initiatives to increase returns to shareholders, culminating in a continuation vote at the AGM in July 2026. We are hopeful that these will begin to feed through to a much tighter discount trading range for HVPE.”