Here are the top six investment trusts for cheaper stocks

Due to liquidity constraints, investment trusts are in the best position to take advantage of the most favorable opportunities

Due to the possibility of having to sell assets to satisfy redemptions, managers of open-ended funds must carefully assess the liquidity of their holdings. The majority of open-ended funds will frequently have very limited options regarding their ability to invest in smaller-cap stocks because small and mid-sized businesses are less liquid than larger ones. Most open-ended funds are unable to invest in some of the top companies.

When investing in industries like this, investment trusts offer this significant benefit. Because investors are abruptly withdrawing their money, investment trusts are not as vulnerable to having to sell assets quickly. They can adopt a more value-oriented and long-term perspective as a result.

Essential decisions in the field of investment trusts.

What are some of the main choices in the industry? Mercantile Investment Trust (LSE: MRC), which is managed by JPMorgan, is the largest small- and mid-cap trust, with £2.02 billion in assets under management (including a current 14 percent gearing). In terms of net asset value (NAV), the trust has a five-year total return of 10.6% annually, which is 0.9 percentage points higher than the FTSE All-Share, excluding FTSE 100 stocks and investment firms. Over the course of three and ten years, it has also outperformed its benchmark. 10% is the discount to NAV.

Aberforth Smaller Companies (LSE: ASL), which has assets of £10.4 billion and a gearing of slightly less than 3%, is the largest trust devoted to small caps. In addition, it trades at a 10 percent discount to NAV, and portfolio valuations provide an additional discount. Its holdings are priced at a ratio of seven times projected earnings, which is 22 percent lower than the average for its investment universe. Over a five-year period, the NAV return is 14.7 percent annually.

The growth at a reasonable price (Garp) strategy is used by Henderson Smaller Companies (LSE: HSL), which concentrates on superior businesses with solid balance sheets and competitive market positions. Since joint manager Neil Hermon was hired in November 2002 and will retire this month, the long-term return has been solid, with NAV total returns of nearly 12%. Nevertheless, with an annual return of 5%, performance has declined over the last five years. At the moment, the discount to NAV is just under 9%, and the gearing is 13%.

After JPMorgan's mid-cap and small-cap trusts merged last year, JPMorgan UK Small Cap Growth and Income (LSE: JUGI) implemented a new dividend policy that income investors may find appealing. The trust now distributes quarterly dividends equal to 4% of the annual net asset value at the end of July. This necessitates a quality focus because the portfolio's return on invested capital (ROIC) is 15% (against the index's 9%), and its free cash-flow yield is 8.5 percent (compared to the index's 5.5 percent). The NAV return over a five-year period is 9.5 percent annually. The gearing is about 8%, and the NAV discount is 7.5 percent.

Investment trusts for targeted portfolios.

For focused portfolios, Rockwood Strategic (LSE: RKW) and Odyssean Investment Trust (LSE: OIT) are viable options. Although both are managed by Harwood Capital managers, Rockwood takes a different tack and is more interested in recovery plays and smaller stocks.

Over half of the portfolio is comprised of Odyssean's top four holdings. Since its founding, more than ten of its holdings have been acquired, frequently at a substantial premium. In addition to the discount to NAV of 6.5 percent, the five-year NAV return is 8 percent annually. The fund, which has returned about 21% annually over the last five years, is composed of 60% of Rockwood's top ten holdings. The shares, which are currently trading at 1%, frequently command a premium.

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