The cheapest investment trusts

The performance of the 15 cheapest stocks we identified a year ago demonstrates the risks involved in chasing discounts without seeing them in a wider context. While the average total return from the shares was mildly positive, total returns varied wildly from a 42 per cent gain in the case of Dunedin Enterprise to a 60 per cent loss from PME African Infrastructure. A large discount can be the market's way of telling investors that a fall in NAV is coming, which in turn could widen the discount further. But sometimes discounts become too wide based on unfounded fears or even for technical reasons, which can be an opportunity for brave investors to make a profit.

Our list of the 15 cheapest shares on the market is based on 1 October prices. Below it we've highlighted four of these cheap situations that look to us among the potentially more promising. Nothing here is for widows and orphans, though.

Source: Numis Securities

Cayenne investment trust

There is more to Cayenne investment trust's discount than meets the eye. The fund invests in other trusts as well as using hedging to protect capital, although this can also temper upside. On the face of it, a discount of 4.8 per cent hardly looks like something to write home about, even if it is cheap compared with the run of play. In fact, a discount control mechanism means Cayenne's discount never gets too wide. Of more interest, though, is the underlying discount on Cayenne's holdings. It put this at 35 per cent when it reported results to the end of July. What's more, the trust calculated that there would be 20p upside to its NAV if the discount attached to the underlying holdings reverted back to estimated 'reasonable' levels based on 10-year average discounts.

European investment trust

It is little surprise that a European investment trust has made it on to the list of 15 cheap trusts. The uncertainty in the region has made for very choppy equity markets which has scared off many investors. The European Investment Trust has suffered more than others, though. The team at Edinburgh Partners that manages the fund, having taken over the mandate in February 2010, is respected and its strategy of backing stocks with strong visibility balanced with some out-of-favour value plays looks sensible. However, recent performance has been disappointing, with an NAV return in the year to date, based on Numis's figures, of 10.4 per cent compared with a peer-group average of 18.2 per cent and 11.1 per cent from the FTSE Europe ex UK index.

BH Global

BH Global is a so-called feeder fund that invests in the full range of hedge funds managed by industry giant Brevan Howard. The fund aims to produce decent absolute returns rather than measuring its performance against an index. Due to the relatively smooth nature of returns, the discount investors buy in at can make a big difference. What's more, the discount on the trust has been fairly variable given the strategy it pursues. In fact, while the current discount is at the wide end of the range, over the past three years the shares have also traded at close to parity with NAV. The funds that the trust invests in tend to benefit from market volatility and performance has been good over recent months.

India Capital Growth

This year, shareholders in India Capital Growth investment trust have faced the grim situation of seeing NAV rise impressively - the year-to-date NAV return is 29 per cent following an exceptional start to the year - while the share price has remained flat. There are a number of explanations for the widening discount that has suppressed the strong underlying performance. The trust is small and a large shareholding by Caledonia Investment Trust means its shares are particularly illiquid. It also invests some of the portfolio - about 28 per cent - in small-cap stocks that are considered risky, although the trust has revamped its portfolio since its troubled day as a microcap investor. A torrid 2011 for the Indian stock market put investors off the region and political grid lock, high inflation and slowing growth are all concerns. But positive news has come from recent economic reform measures, though. In addition, if India Capital continues to produce strong performance, it may prove too much for the market to ignore.