Discounted funds a good buy for end of Isa season

Canny investors should look to cheaper trusts in a bid to make the most of their annual Isa allowance, says Laura Suter

With the Isa deadline looming next week, investors searching for a bargain to fill their annual allowance should look to the discounted funds that are primed to rebound.

Investment trusts are funds that are listed on the stock exchange, like shares in a quoted company. This means investors buy them at the market price.

This price is broadly based on the value of the fund’s underlying assets, but varies with demand and investor sentiment.

If an investment trust is popular it will trade at a premium to the value of its assets, meaning that investors are effectively paying more than the fund is worth. But trusts that are less in demand will trade at a discount – allowing investors to buy at a bargain price.

Average discounts across investment trusts have reduced over recent years, making it harder to find these bargain funds. The average discount on investment trusts is currently 5.3pc – up on 3.3pc this time last year but far lower than the 17.8pc during the 2008 crisis.

Every week The Daily Telegraph’s Questor share-tipping column looks at the most attractive investment trust discounts. Here we round up the best for this Isa season.

Discount:

10.4pc This fund is the ideal pick for those worried that the current long run in stock markets may be coming to its end.

The trust has a “value” approach to investing, meaning it buys companies that are undervalued and few others are buying. It relies on the company’s fortunes or investor sentiment turning around – or both.

The trust also focuses on small companies, so it has avoided a number of the stocks that seem most overvalued. Since 1990 the valuation of shares in large companies has on average been 23pc higher than that of their smaller counterparts. That difference has now ballooned to 76pc.

Peter Walls, who manages a portfolio of investment trusts and invests in this trust, said the current low valuation of the trust’s assets is due to the “Brexit discount” seen on a number of domestically focused UK stocks.

Examples of the trust’s holdings include wealth manager Brewin Dolphin, recruiter Robert Walters and bus and train operator FirstGroup.

The discount has narrowed from 14pc when Questor first tipped it – but it’s still a buy.

Discount:

15.3pc Those looking for reliable and growing income should look no further than the stable of investment trusts that have achieved “dividend hero” status by increasing their payouts every year for decades.

Caledonia is one such trust, running £1.9bn of money invested in companies such as Gala Bingo, asset manager Seven Investment Management and British American Tobacco. It has raised its dividend for 50 consecutive years, but despite this is trading at more than a 15pc discount.

The trust has also delivered stellar performance, gaining 68pc over the past five years, compared to 37pc for the FTSE All-Share Index.

Analysts said the trust’s large discount is likely due to its low profile, leaving it off the radar of many investors. Fees are relatively high at 1.14pc – which may put some investors off.

Discount:

9.9pc Edinburgh Investment Trust has been a regular Questor tip – first in October 2016 and then again in February this year. In that time the trust’s share price barely moved, and has fallen since the February tip. The trust was invested in Provident Financial and was hit by the firm’s recent troubles.

As with Aberforth, Edinburgh is a good buy if you’re worried about stock markets stumbling.

The trust, managed by Mark Barnett of Invesco Perpetual, also invests in the “value” end of the market, as well as income producing stocks. Current