Investment company fans often like to talk excitedly about the opportunities that open up when listed funds start to trade at weighty discounts to net asset value (NAV). The name of the game here is to buy into well-managed closed-end funds where the market has turned bearish for no obvious reason and then wait for the discount to tighten and the shares to rally as the market cycle progresses.

There is a flipside to this argument, however. Sometimes those discounts stay stubbornly high or aren’t affected by a cyclical switch. Maybe the fund has an ‘issue’ that the market is pricing or sometimes a whole sector can fall into a funk where investors simply don’t believe what they are being told.

In these circumstances, discount hunters can become marooned in a stock that is cheap but isn’t going anywhere because there is no catalyst for an upward move.

My sense is that we are approaching a critical moment when investment companies that have been left behind must get their act together and do something to create that catalyst.

There are now many well-regarded funds lingering at the back of the class with chunky discounts. What constitutes ‘chunky’? Having talked to market observers, the general consensus is that a discount of 20% is about right.

Obviously, a great deal depends on whether the discount is primarily because of a cyclical ‘funk’ (out-of-favour technology, for instance) or a more structural issue. It’s not unusual for hugely popular funds like Scottish Mortgage (SMT ) to move from a premium to a big discount (currently 15% versus a 12-month average of 8%)  and then back to a premium again as markets sentiment shifts.

But even allowing for this cyclical shift – and investors’ willingness to accept discounts of 5-15% – the 20% mark does represent something of a breach above which investors start getting agitated. That agitation could be quiet – emails to the chair – or more vocal – if value-hunting funds start appearing on the register. But sometimes that agitation still doesn’t achieve results and the discount stays stubbornly above 20%.

Looking at investment trust data from the team at Numis, I counted the following funds at varying discount levels:

• Over 50% discount = 27 funds
• 40%-50% discount = 19 funds
• 30%-40% = 32 funds
• 20%-30% = 33 funds

If we exclude some double counting for funds with different share classes, I reckon we’re looking at well over 100 investment companies struggling in the 20%-plus category. What can these funds do to get their discounts down?

There are the usual actions that can achieve some improvements: boosting marketing, better investor communication, and reaching out to private investors more effectively. These are all useful exercises but on their own are probably not enough.

Conventional wisdom is that engaging in a more aggressive discount management policy works. I’m not so sure. I have racked my brain to think of a fund trading at a discount above 20% where systematically buying back shares has succeeded in re-rating the stock significantly. I couldn’t think of one, nor could at least two experienced observers I talked to. If you can cite an example, let me know in a comment below. My opinion though is that discount management helps but isn’t really going to move the dial.

Fund managers and directors buying the shares also helps but, again, I struggle to see how that really narrows the discount substantially. That said, a combination of share purchases and an aggressive discount management policy could turn a wide 35% discount into a less wide 25% discount.

But for deeply out-of-favour trusts, bolder action is required, and there are three main options. The first is hitting the reset button. This worked for what is now JPMorgan Global Growth & Income (JGGI ), which changed its name, started to pay out more income, and then ran a big marketing campaign. It also swallowed up two other investment trusts – Scottis and JPMorgan Elect – in the process.

The next option is what can loosely be called corporate activity. Take the example of Pershing Square Holdings (PSH ). This US-based but UK-listed hedge fund has a great track record and an impressive investment team. On paper, it’s a brilliant way of playing quality US equities – I own shares in it. But it trades at a persistent and chunky discount, which is currently at 34%. It has tried many of the measures I have suggested above but the discount remains stubbornly high.

In its annual investor meeting last week, fund manager Bill Ackman discussed relisting the business in the US, where it could market itself to US investors. This would be an excellent idea but I’m sure it won’t be easy.

Another corporate action, even less common, is a takeover. We haven’t seen too much of this, but it may become more common as fund managers begin to think through their options. I’d keep an eye on infrastructure funds, where big discounts have previously attracted the attention of bidders.

Wind up or go private

The final option is what I call the ‘show-and-tell’ option. If your fund trades at a 30-60% discount and shows no sign of drastically improving, then either the market is right to be deeply cynical about the net asset value – in which case the share price will remain marooned for many years – or, as fund managers, you need to put your money where your mouth is.

That last step involves one of two steps. The first is to wind down the fund and get as close to NAV as possible via a disposal of the assets. If the NAV number is right, investors will be well rewarded and the discount will shrink via realisations. This is the more popular route and is currently what’s happening at VPC Speciality Lending (VSL).

The more drastic, but I feel increasingly necessary option, is to take the fund private. This happens because, as fund managers, you are utterly convinced the share price is wrong and that you can make money from that mispricing.

Fund managers who avoid these options and just hope and pray the discount will miraculously drift below 20% are fooling themselves, unless the cycle turns aggressively in their favour. The only sector where this might be the case is property/real estate, where I can see 20%-plus discounts tightening dramatically as confidence returns. Everywhere else, the option of just sitting tight on deep discounts is a deeply cynical exercise in picking up a fat fee without putting the fund managers’ own money on the line.

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