Buy good long returns at a discount with Lowland

As a result, when the trust is doing well it can trade at a premium to net asset value (NAV), in particular because it is an income fund with an attractive and rising dividend stream. Lowland has increased its dividend every year since 2010, a compound growth rate of 8.5 per cent. But during the (usually) short periods in which its performance slips, it can move out to a discount to NAV.

The trust has struggled over the past year, in part because of its exposure to industrials, which account for more than a quarter of the portfolio. Its managers are retaining their position in the sector "because of the strengths of the individual holdings rather than a macroeconomic-based conviction. These companies are generating cash and debt is low. They have excellent products and they are genuinely competitive in the global market".

As a result, the trust is trading at a discount of more than 9 per cent - one of its widest discounts in recent years. When an investment trust with good long-term returns moves to a discount, this can be a good moment to buy it, as it may well start to perform well again and return to a premium.

"We believe that Lowland currently represents an interesting value opportunity and are therefore adding it to our model portfolio," say analysts at broker Winterflood. "Lowland has a strong long-term performance record, outperforming the FTSE All-Share in NAV and share price terms over the past three and five years, and we rate the manager, James Henderson, highly. However, the contrarian, value-based investment approach can lead to periods of underperformance, as has been the case over the past six months when the NAV fell 2 per cent compared with a rise for the FTSE All-Share.

"But this level of discount represents a significant value opportunity, and we believe that the trust will deliver outperformance over the long term."

Indeed, performance already seems to be turning, with the trust's NAV making positive returns over one and three months - well ahead of its share price performance.

The trust's ongoing charge is just 0.87 per cent, despite a performance fee of 15 per cent of any outperformance of the FTSE All-Share index in excess of 10 per cent over the average of the past three years, on a total return basis.

There is no guarantee that the trust's performance will turn, or that its discount to NAV will tighten or return to a premium. And even if this eventually happens you may have to wait.

However, the trust has recovered from its past periods of underperformance and its discount has come in. For example, we tipped the trust while on a discount of 8.5 per cent last February, but this rapidly tightened in the months after so that at one point in 2015 it was on a premium of more than 3 per cent.

So, if you want to buy cheaply into a trust that is likely to deliver strong returns and outperformance, Lowland is worth a look. Buy.

Source: Morningstar & *Henderson

Performance

Source: Morningstar, as at 14 March 2016

Top 10 holdings, as at 31 January 2016 (%)

Sector breakdown (%)