Something odd is going on in the sedate world of investment trusts.

For years, UK income and growth trusts — closed-end investment vehicles that aim to combine an above-average dividend yield with modest capital growth — have traded at a discount to the value of their underlying portfolios, often of up to 10 per cent.

However, for the past six months or so, the opposite phenomenon has applied, with such trusts trading at a premium to net asset value. The explanation lies in rock-bottom interest rates or, rather, the sector’s allure to yield-hungry investors of solid and rising dividends when cash on deposit offers paltry returns.

Such is the situation at Edinburgh Investment Trust, still the biggest of its kind. At 317¼p, the shares sit 5 per cent above NAV and offer a 6.4 per cent yield. Edinburgh has other attractions. Since last September, it has been under new management, with the investment mandate having passed to Invesco Perpetual, whose Neil Woodford comes with one of the best track records in UK fund management.

Mr Woodford’s approach has been to refashion Edinburgh into a closed-end clone of his highly successful Perpetual High Income unit trust. That has meant a shift to a more concentrated portfolio of about 60 stocks, against more than 100 before, and a more defensive investment style involving large, soundly financed companies whose earnings are largely insulated from economic downturn.

That translates into pharmaceuticals (AstraZeneca and GlaxoSmithKline are its two biggest holdings), tobacco (which accounts for nearly one fifth of the total portfolio) and, to a lesser extent, food retailers and power utilities.

That safe-haven stance fared relatively well in the savage stock market sell-off that followed the collapse of Lehman Brothers, with Edinburgh’s NAV falling 26.3 per cent in the six months to March 31, against the 28 per cent fall in the wider stock market. However, Edinburgh has since been left behind by the post-March rally in shares that has begun to price in a so-called V-shaped recovery. Over the past six months Edinburgh’s NAV has fallen by 9 per cent, against a 6 per cent advance in the FTSE all-share index.

That is not to undermine the longer-term wisdom of Mr Woodford’s style, which is predicated on the assumption that sustained economic growth is still three to four years away, nor the attraction of Edinburgh’s yield. The allure of both will be enhanced if the present rally in cyclical stocks runs out of steam.

The problem is that, as long as Edinburgh’s premium to NAV persists, investors who seek safety would do better to back Perpetual through its unit trusts — despite their lower yield (4.7 per cent), lack of gearing and higher management fees — than through their closed-end alternative. Pass.

Punch Taverns

Whisper it quietly, but Punch Taverns looks likely to remain in the land of the living. Redburn Partners, the research house, predicted in December that Britain’s biggest pub operator was “likely to become a zombie company”, unable to access the cash being generated by its various securitised pub vehicles.

Until March, it looked as if the stock market had reached the same conclusion: at 32¼p, the shares had collapsed 98 per cent from their 2007 high. Yet a slightly less bearish assessment has prevailed. At yesterday’s 155p, Punch has been the best performer in the FTSE all-share index over the past three months.

In fairness, Giles Thorley, the chief chief executive of Punch, has consistently asserted that the company could meet its debt repayment obligations and avoid default.

Yesterday’s sale of 11 pubs to Greene King for £30.4 million may, on its own, be small beer, but it is important in the context of the group’s continuing asset disposal programme. It not only reinforces the inherent value tied up in Punch’s pub estate, but also allows the group to buy back debt at well below face value.

Based on recent repurchases, it should be able to use yesterday’s proceeds to retire at least £50 million of borrowings. Further such deals are in the pipeline.

As a result, the repayment of the convertible bond that matures at the end of next year is looking more like a formality. The trading outlook is also looking a little less bleak, helped by sunnier weather and the boost to consumers’ disposable income from lower mortgage costs. At three times current-year earnings, hold on.

Oxford Instruments

It is said that you should invest only in what you understand. But such a commonsense approach has its shortcomings in evaluating Oxford Instruments, the university technology spin-off that marks its half-centenary this year. Unless you possess a science PhD, much of Oxford’s output is likely to go over your head.

However, its numbers are easier to comprehend. Full-year results showed both revenues and pre-tax profits up 17 per cent, with its order book ahead 29 per cent on the year.

Oxford has been helped by swift cost-cutting and a weak pound. It bears the majority of its costs in sterling but books 80 per cent of sales in dollars, euros and yen.

The caveat is that weaker demand from industrial markets — manufacturers that have deferred the purchase of expensive analytical instruments — means that it expects profits to be flat this year. The shares fell by 7 per cent.

But Oxford should continue to deliver its promised improvement in operating margins, now 6.3 per cent. And at 137½p, or less than ten times earnings, and yielding 6.1 per cent, the shares are cheap, given Oxford’s strong intellectual property in what are long-term growth markets. Buy.

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