For this reason, I’ve been holding tight to a couple of investment trusts in my portfolio. There’s also one I’m tempted to buy when I can find the cash.

Scottish Mortgage Investment Trust

The once-incredibly-popular Scottish Mortgage Investment Trust (LSE: SMT) has had a tricky couple of years. Go back to November 2021 and the share price stood above 1,500p. Fast-forward to today and the very same stock changes hands for a little over 821p. This shows just how averse investors have been to many go-go growth stocks in recent times.

On a more optimistic note, I reckon these are ideal conditions for patient Fools to consider loading up. And that’s exactly what I’ve been doing. Scottish Mortgage is the second-largest holding in my Stocks and Shares ISA.

An unwelcome rebound in inflation could stifle any positive sentiment. However, I’m encouraged by last week’s decision by the US Federal Reserve to (finally) begin lowering interest rates, especially as the trust has stakes in private companies that might IPO under the right conditions. Elon Musk’s SpaceX is surely one candidate.

Whisper it, but Scottish Mortgage could be about to make up for lost time.

Smithson Investment Trust

Another investment trust that I own is FTSE 250 constituent Smithson (LSE: SSON). Rather than buy glitzy tech titans, manager Simon Barnard goes fishing for stocks further down the market food chain.

Again, this strategy has struggled in a high interest rate environment since many/most smaller businesses take on debt to grow. But with the prospect of repayments coming down, they could be poised to outperform.

With a relatively concentrated portfolio of just 34 holdings, there’s still a fair dollop of risk here. Management fees will impact on returns too.

On the other hand, I’m comforted by the fact that Smithson picks stocks using the same modus operandi as its big brother — Terry Smith’s multi-billion pound Fundsmith Equity Fund. He looks to buy quality companies (that are able to reinvest cash flow at high rates of return) and then ‘do nothing’.

Smithson has been out of favour for a while but I suspect things could be about to get interesting.

Blackrock World Mining Trust

A final FTSE member that I think could do very well (and I’m considering buying) is Blackrock World Mining Trust (LSE: BRWM).

Sadly — but unsurprisingly — this hasn’t been the case recently. The shares are down nearly 11% in the last 12 months as economic woes have constrained demand from big metal buyers like China. This helps to underline the point that investing in anything commodity-related is not for the faint-hearted.

Then again, this trust spreads investors’ money around all of the biggest explorers/producers in the sector, including FTSE 100-listed beasts like Rio Tinto, Anglo American and Glencore.

This diversification won’t stop it from falling in value. After all, none of these businesses have a say on where metal prices go next. But it does feel a whole lot less scary than going ‘all-in’ on just one player.

The chunky dividend yield should help to offset any temporary weakness in the share price too.

The post I think these FTSE investment trusts will soar in the next bull market appeared first on The Twelfth Magpie.

Great start

Smithson Investment Trust (LSE: SSON) was launched back in October 2018 and immediately attracted a lot of investors’ money, including my own. This initial popularity propelled it into the UK market’s second tier where it has stayed ever since.

Drawing on the same strategy at its big brother — Terry Smith’s Fundsmith Equity fund — the trust makes a point of trying to buy quality companies at a good price and then sticking with them like glue.

Up until the beginning of 2022, this paid off handsomely. The trust vastly outperformed its benchmark, helped by the market boom in the aftermath of the pandemic.

Going cheap

Since then, however, things haven’t been so stellar.

Actually, that’s putting it kindly. From a peak of just over 2,000p, the share price tumbled by nearly half. Roughly two years later and sentiment has improved, albeit not by much.

To some extent, I sympathise with manager Simon Barnard on this. Small- and mid-cap growth stocks — the sort that Smithson looks to invest in — have been shunned thanks to their general reliance on debt to bring their growth plans to fruition. That’s not ideal when interest rates are high.

This has left the trust trading at a discount to its net asset value. As of 8 August, this stood at just under 12%.

But for how much longer will this be the case?

Rate cut incoming?

With almost half of the portfolio taken up by US companies, a lot surely rests on what happens to interest rates across the pond. A series of cuts in short succession — starting in September — could see the trust quickly make up for lost time.

Then again, it’s best to expect the unexpected. An unwelcome development could feasibly push the Smithson share price lower or, at best, lead to it trading sideways.

One also needs to bear in mind that the trust’s concentrated portfolio (only 34 holdings) potentially makes for a volatile ride.

Safety buffer

On the flip side, its lower exposure to the US compared to other global funds may actually serve as a buffer of sorts if the markets are left disappointed by Jerome Powell’s next decision.

The Bank of England’s decision to begin dropping rates in August should also be encouraging for Smithson. Roughly 17% of the portfolio consists of UK-listed companies.

And of course, having a concentrated portfolio could lead to outperformance if all works out well.

Time to buy?

While the last couple of years have been tough and my patience has been tested, I’m inclined to think a revival in Smithson’s fortunes might finally be on the cards.

If and when the global economy does get roaring again, the sort of companies it owns — including luxury fashion brand Moncler and internet infrastructure provider Verisign — could register the best gains. That discount could quickly become a premium.

Since I still believe that market-beating results come from owning only the best it has to offer, it makes sense for me to hold on.

In fact, I’m strongly considering raising my stake when cash next comes in.

The post This FTSE 250 stock trades at a big discount and looks ready to re-rate appeared first on The Twelfth Magpie.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

3i Group

What it does: 3i Group is a closed-ended investment fund with a global focus on private equity and infrastructure.

By Charlie Carman. 3i Group (LSE:III) has performed exceptionally well in recent years. I think there’s plenty of room for more growth ahead.

Granted, private equity exposure has unique risks. Unlisted shares have lower liquidity than their publicly traded counterparts and are often more volatile. However, that should be weighed against the potential for higher returns.

Dozens of companies feature in 3i Group’s portfolio, but the jewel in the crown is Action, a discount retailer. It represents around 65% of the fund’s total holdings.

Action has nearly 2,700 stores and a product range spanning toys, household goods, gardening items, pet products, and more. It’s the fastest-growing non-food discounter in Europe.

3i Group’s significant concentration in one company might be a cause for concern. Nonetheless, Action’s growth story doesn’t appear to be ending anytime soon.

Trading at a forward price-to-earnings (P/E) ratio under five, 3i Group shares offer good value today in my view.

Charlie Carman does not own shares in 3i Group. 

BAE Systems

What it does: BAE Systems is Britain’s largest defence contractor and a critical supplier to the UK and US armed forces.

By Royston Wild. Defence business BAE Systems (LSE:BA.) has seen its share price slump almost 10% from June’s record closing peaks of £14. I think this could present an attractive dip-buying opportunity for long-term investors.

The FTSE 100 company’s share price has exploded following Russia’s invasion of Ukraine in 2022. It looks poised for further gains, too, as Western nations rebuild their militaries following years of underinvestment.

In the UK, new prime minister Keir Starmer has vowed to increase defence spending to 2.5%. It mirrors similar steps by other major NATO nations as fears over Chinese and Russian expansionism rise.

BAE Systems is enjoying record orders against this backcloth. And City analysts expect its products and services to remain in high demand. They forecast earnings growth of 7% for this year, and an improved 12% rise in 2025.

The defence sector is highly competitive, and a failure to keep up with technological advancements could compromise future sales. Still, BAE Systems’ long track record of providing market-leading technologies helps soothe any fears I have on this front.

Royston Wild does not own shares in BAE Systems.

Prudential

What it does: Prudential was founded in 1848 and remains one of the biggest UK insurers, selling pensions and protection policies around the world, but primarily in Asia.

By Harvey Jones. Investors in FTSE 100 insurer Prudential (LSE: PRU) have had a rotten time and there’s no sign of respite.

The Prudential share price has crashed 53.79% over five years. It’s down 35.02% over one year, 17.87% over three months and 9.8% over the last month.

What was supposed to be Prudential’s unique selling point – its exposure to booming China and Asia – has turned into a millstone as the Chinese economy tanks.

Yet I think there’s now a real opportunity here.

Pru shares are dirt cheap, trading at just 9.92 times earnings. Earlier this month, broker Jefferies recently said the stock now trades at a “deeply discounted” multiple and set a target price of 1,350p to 1,310p. That’s a potential upside of almost 97% from today’s 686p.

China’s plight could intensify as the property market crumbles and US tensions grow. Yet amid all the macroeconomic and geopolitical gloom, investors risk losing sight of the fact that Prudential’s business profits jumped 45% to $3.1bn in 2023.

There’s a bit of dividend income on offer, too, courtesy of its 2.41% trailing yield. That’s below the FTSE 100 average but the board hiked the full-year dividend by 9% last year, which shows willing.

Prudential’s shares may slide further. But there’s huge recovery potential for long-term investors like me. I’ll consider buying it in August.

Harvey Jones does not own shares in Prudential.

Prudential

What it does: Prudential offers insurance and asset management products across Asia and Africa.

By Andrew Mackie: My mantra is to invest in businesses that I believe the market is undervaluing. As it trades at a 12-year low, Prudential (LSE: PRU) is a stock in serious bargain territory.

In August 2023, it set out a new strategy. Through to 2027, the company is aiming to grow new business profit at a compound annual growth rate of 15-20%. Based on its 2023 results, I have a lot of confidence that it will meet this target.

China and Hong Kong remain its growth engines. The Chinese Mainland has a population of 1.4bn, with incredibly low insurance penetration rates. In 2023, Hong Kong contributed to 45% of new business profits, driven by a surge in visitors from the Mainland.

One principal reason its share price continues to languish, relate to investor fears over the state of the Chinese property market. As prices have fallen, it remains unclear what effect this will have on economic growth across the region.

Nevertheless, the fundamental growth drivers for savings and retirement products in China and more widely remain intact. That is why I doubled down on my holdings in the last week.

Andrew Mackie owns shares in Prudential.

Smithson Investment Trust

What it does: Smithson Investment Trust invests in quality small and mid-sized companies with a market capitalisation of between £500m and £15bn

By Paul Summers: As an existing holder, I can’t say I’ve been bowled over by the performance of Smithson Investment Trust (LSE: SSON) in the last couple of years. Then again, at least some of this has been beyond the control of manager Simon Barnard. 

Smithson looks for small and mid-cap growth stocks from around the world – just the sort of investments that tend to be out of favour in a high interest rate environment. But with rates here and ‘across the pond’ looking like they will fall soon, risk appetite should increase. 

Of course, any further delays to these cuts could hit sentiment. But Smithson shares already trade at an attractive 11% discount to net assets. 

Bias aside, I’m optimistic that this investment trust can catch up for lost time, finish 2024 in style and possibly outperform its mega-cap ‘big brother’ – Terry Smith’s Fundsmith Equity Fund. 

Paul Summers owns shares in Smithson Investment Trust and Fundsmith Equity Fund

The post Best British growth stocks to consider buying in August appeared first on The Twelfth Magpie.

Here are a couple that catch my eye.

Ticking lower

During the pandemic, shares in watches and jewellery seller Watches of Switzerland (LSE: WOSG) just couldn’t stop climbing in value. Had I invested when Boris Johnson first sent us into lockdown in March 2020, I would have multiplied my cash many times over by the end of 2021.

Unfortunately, a lot of those gains have since been lost.

Not that this should come as a surprise. A fall in demand for luxury goods is always likely when interest rates march upward.

With analysts now predicting a cut in 2024, however, I’m more bullish on the company’s fortunes than I’ve been for a while. This development could push consumers to adopt a more relaxed attitude to discretionary spending.

Better times ahead

None of this is nailed on. And even if a cut does come, it could be later than anticipated. This means the shares could have further to fall.

Oh, and there’s no dividend stream to keep me patient if this were to happen.

But I wonder if a lot of this is already priced in. As I type, Watches trades at 12 times earnings. That’s significantly lower than the five-year average valuation of 17.

With full-year guidance maintained when it last reported to the market in December and several high-revenue showrooms set to reopen after being refurbished, I think now is as good a time as any to begin building a position if I can find the cash.

Under pressure

A second FTSE 250 member that I think could bounce back in style this year is Smithson Investment Trust (LSE: SSON).

At least, I hope this is the case. I’ve been a holder for a few years now. And while the shares also did extremely well during the ‘lockdown years’, recent performance has been far more tough going.

Again, the main reason for this isn’t hard to fathom. In troubling economic times, investors become more averse to the sort of stocks Smithson holds, namely those of small- and mid-cap businesses.

But this could be exactly the moment to increase my position if I’m able to do so.

Quality rules

As with its index peer, I reckon the probability of a good year at Smithson depends on how soon an interest rate cut comes and how big it is. Nothing can be guaranteed.

On the other hand, the stock market is forward-looking. Signs of multiple cuts in short succession could put a rocket under the sort of growth stocks this trust owns.

Again, there’s no passive income here. An annual management charge of 0.9% also applies.

But these are things I’m prepared to accept given that manager Simon Barnard only looks to invest in quality companies rather than any old market riff-raff.

This isn’t a complete bet on the UK economy either. Almost half of the portfolio is listed in the US.

Like its big brother — Terry Smith’s Fundsmith Equity fund — I think this year could see a return to its benchmark-beating form.

The post I’d back these FTSE 250 growth stocks to bounce back in style in 2024 appeared first on The Twelfth Magpie.

Here are my three biggest holdings.

LF Blue Whale Growth Fund

Managed by Stephen Yiu, the LF Blue Whale Growth Fund seeks to own stakes in “beautiful companies” — the sort of high-quality growth stocks he thinks stand a good chance of compounding investors’ money at an above-average rate.

Some positions will be familiar to UK readers, Microsoft, Nvidia and Visa. Others, such as oil and natural gas giant Canadian Natural Resources and semi-conductor equipment manufacturer Lam Research probably less so.

Performance-wise, it’s a case of so far, so good. Since its inception almost six years ago, Blue Whale has delivered annualised returns of 11.7%. That’s far better than the 8% achieved by its benchmark (IA Global Average).

Yes, managment fees detract from this result. There’s also no guarantee the fund can continue to outperform the market over the long term (most active funds don’t).

However, Blue Whale’s relatively small size (£850m) arguably gives it more flexibility as to where it invests. Its exposure to AI could also turbocharge returns.

Smithson Investment Trust

FTSE 250 member Smithson Investment Trust (LSE: SSON) is another big holding. It’s similar to Blue Whale in running a concentrated portfolio of high-quality stocks. However, there’s at least one key difference.

The median market-cap of companies in Smithson’s portfolio is £6.6bn compared to Blue Whale’s average of over £100bn. So there’s no overlap in companies here (helping to reduce risk).

That said, I can’t deny recent performance has been woeful. The Smithson share price crashed 35% in 2022 as high inflation and galloping interest rates pushed investors away from growth stocks. This leaves the investment trust lagging its benchmark since inception.

That’s clearly not ideal. However, in manager Simon Barnard’s defence, Smithson was seriously outperforming until last year.

For this reason, I’m staying put. Indeed, I think this outperformance will resume when the next bull market kicks in given his commitment to only buying companies with “a dominant market share in their niche product or service or having brands or patents which others would find difficult, if not impossible, to replicate“.

Vanguard Global Small-Cap Index Fund

Rounding off my top three positions is a passive fund. As it sounds, the Vanguard Global Small-Cap Index Fund seeks to track an index rather than outperform it.

This keeps costs low. It also means that my money is spread around a more diversified portfolio (providing some balance from Blue Whale and Smithson). In practice, this allows me to sleep soundly even if markets crash, or merely dip.

No prizes for guessing what the focus is here, minnows from developed markets around the world, no fewer than 4,356 of them.

Why bother? Well, copious academic research has consistently shown that smaller stocks tend to outperform big ol’ blue-chips over time. The snag is that they’re usually far more volatile.

For a patient Fool like me, this is a price worth paying.

In fact, I’d be very happy if I’d invested £10,000 back at the start of 2010. This would have been worth nearly £42,000 by July!

The post The 3 biggest holdings in my SIPP are… appeared first on The Twelfth Magpie.

As we start 2023, I have money in two different investment trusts. Here’s a look at the products I own.

Disruptive growth stocks

Let’s start with Scottish Mortgage Investment Trust (LSE: SMT). This is a growth-focused trust that invests in disruptive technology companies and provides exposure to themes such as decarbonisation, FinTech, and HealthTech. It has nothing to do with Scottish mortgages.

I use this trust to get exposure to higher-risk, disruptive growth stocks that I wouldn’t buy individually. Biotechnology company Moderna (the trust’s top holding) is a good example here. This is not a stock I would buy myself as it’s a bit too speculative for me. However, I’m happy to own it as part of a diversified trust.

I also use SMT to get exposure to unlisted growth companies such as ByteDance (the owner of TikTok) and Epic Games (the creator of Fortnite), as it allocates a small proportion of its capital to such firms. Normally, unlisted companies are only accessible to sophisticated investors who have millions of pounds to throw around.

Now Scottish Mortgage is very much a higher-risk investment trust. So I don’t have a large position here. By keeping my position small, I can benefit from any potential upside without having to worry too much about the impact on my portfolio if the trust experiences a sizeable fall (like it did in 2022).

Smaller companies with strong financials

The other investment trust I currently own is Smithson (LSE: SSON). This trust, which is managed by the team at Fundsmith, is also growth focused. However, it targets high-quality small- and mid-cap stocks that have strong financials. Like its big brother Fundsmith Equity, it has a focus on companies that are profitable and have strong balance sheets.

I use this trust to get exposure to top-notch small- and medium-sized companies listed internationally. Cybersecurity company Fortinet, medical technology specialist Masimo, and Australian software firm Technology One are some good examples. These stocks are all in the trust’s top 10 holdings. Exposure to these kinds of companies helps to diversify my investment portfolio.

Now, the performance of this trust in 2022 was quite disappointing. Despite its focus on companies with strong financials, its share price fell significantly. There could be further weakness ahead if interest rates keep rising and growth stocks remain out of favour.

However, I’m not too fazed by this short-term underperformance. In the long run, I expect the trust to deliver solid returns, due to its focus on high-quality businesses that have the potential to compound their earnings.

The post The 2 investment trusts I own as we start 2023 appeared first on The Twelfth Magpie.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

ASOS

What it does: ASOS is an online fashion retail firm, comprising 17 different brands. It operates around the globe.

By Andrew Woods. My growth stock pick for October is ASOS (LSE:ASC). For the years ended August, between 2017 and 2021, earnings per share (EPS) rose from 77.2p to 128.9p. Over this period, the company had a compound annual EPS growth rate of 10.8%. I consider that to be consistent and strong.

However, ASOS has been operating in a challenging environment for the retail sector more generally. As the cost-of-living crisis has hit, customers have had less disposable income to spend on clothes. Inflation has also led to shrinking profit margins, as wages and costs increase. The share price reflects these problems, having fallen 82% in the past year.

Despite this, sales improved during the summer and the business expects full-year profits to be within the initial guidance range. Another indication that the company is in decent financial shape is its low levels of debt. This means it’s potentially well placed to work on expansion as we emerge from the pandemic.

Andrew Woods has no position in ASOS.

Kainos Group

What it does: Kainos is an IT support services business that helps companies, organisations and governments digitalise operations.

By Zaven Boyrazian. Kainos Group (LSE:KNOS) helps its clients digitalise operations and deploy Human Capital Management solutions through its partnership with Workday. The group serves the public and private sectors, with its most prominent collaboration being with the National Health Service.

Despite record double-digit organic sales growth, the stock has lost nearly a third of its market capitalisation in the last 12 months. It seems the recent drop in profit margins has spooked some investors. And given that the stock trades at a lofty premium of 47 times earnings, this volatility isn’t surprising.

The drop in profitability comes from the steady decline of pandemic tailwinds rather than internal issues. Meanwhile, demand for Kainos’ services continues to grow with a record level of bookings at £349.8m.

While it’s frustrating to see profitability wobble, the underlying business remains uncompromised. And with an impressive amount of potential, I believe the recent downward trajectory presents an attractive buying opportunity, even if the stock still looks expensive.

Zaven Boyrazian does not own shares in Kainos or Workday.

Halma

What it does: Halma is a collection of businesses focused on industrial safety, environmental monitoring, and life sciences.

By Stephen Wright. I’ve been buying shares in Halma (LSE:HLMA) over the last month. So I’m putting my money where my mouth is on this one. 

The reason I’ve started investing in this stock is that I think that it’s finally trading at an attractive price. The company has always looked great but expensive to me.

Halma has a straightforward business strategy. It attempts to acquire businesses and use the cash they generate to buy more businesses.

The company also has a decentralised corporate culture. In other words, it leaves individual businesses to get on with what they do well. 

Halma’s share price fell below £20 per share recently. At those prices, I think that it’s a terrific buy.

If the stock reaches that price again in October, I’ll be looking to increase my investment significantly. But I think Halma is a great company that I’m happy owning shares in.

Stephen Wright owns shares in Halma.

Spire Healthcare 

What it does: Spire Healthcare provides private healthcare services in the UK through 39 hospitals and eight clinics. 

By Royston Wild. The resilience of healthcare-related spending means stocks like Spire Healthcare (LSE: SPI) are popular picks during tough economic times like these.

Theoretically, Spire’s turnover might suffer as Britons start to feel the pinch. As times get tough, people could be tempted to wait that bit longer for treatment and get it for free on the NHS. 

But the size of NHS waiting lists today means that demand for private care continues to rise strongly. At Spire, revenues rose 7% in the six months to June as private revenues jumped almost 22% year on year.

A record 6.8m people were on NHS waiting lists in September. And the Institute for Fiscal Studies thinks the number will get worse before it gets better, possibly even hitting 10.8m people in 2024 before slowly falling. 

This explains why City analysts think Spire will report healthy earnings growth over the short-to-medium term. It’s expected to flip from losses of 7.1p per share in 2021 to earnings of 4.4p this year. And in 2023 earnings are tipped to double to 8.8p. 

Royston Wild owns shares in Spire Healthcare. 

Scottish Mortgage Investment Trust

What it does: Scottish Mortgage Investment Trust is one of the world’s biggest and most famous trust funds. The Baillie Gifford & Co fund invests globally and looks for strong businesses with above-average returns.

By John Choong. While Scottish Mortgage Investment Trust (LSE: SMT) has performed atrociously thus far this year, investors are told to expect a five-year return. As such, the current drop could pave way for a monumental recovery when the global economy eventually recovers.

The trust’s top holdings are mostly growth stocks, with the likes of Moderna and Tesla having plenty of upside to their earnings over the next decade, and could help boost the share price. Additionally, Scottish Mortgage has quite a healthy exposure to China. As the second largest economy in the world reopens from its Covid-19 lockdowns, Chinese equities are seeing steep rebounds, and Scottish Mortgage is expected to benefit from that to some extent.

Either way, with its share price down nearly 50% from its all-time high, this could be an opportune time for me to start a long-term position in a fund with historical success. That being said, investors should be wary that further lockdowns in China could prolong its road to recovery.

John Choong has no position in Scottish Mortgage Investment Trust.

Smithson Investment Trust

What it does: Smithson is a global investment trust run by Fundsmith. It invests in high-quality, small- and mid-cap growth stocks.

By Edward Sheldon, CFA. Smithson’s (LSE: SSON) share price has taken a big hit in 2022 as growth stocks have fallen out of favour and I think this has presented a buying opportunity. Currently, the investment trust is trading at a significant discount to its net asset value (NAV).

I like Smithson’s approach to investing. Like its big brother, Fundsmith Equity, it typically invests in companies that are highly profitable. Meanwhile, it avoids companies that are heavily leveraged, as well as those in industries that are rapidly changing. Names in the portfolio at the end of August included UK property website powerhouse Rightmove, medical technology company Masimo, and cybersecurity specialist Fortinet – all great companies.

It’s worth pointing out that the Smithson portfolio is quite concentrated. So, stock-specific risk is quite high. If a handful of stocks in the portfolio were to underperform, overall performance could be impacted significantly. I’m comfortable with this risk, however. I think Smithson is a good way to get exposure to smaller growth companies listed internationally.

Edward Sheldon has positions in Smithson Investment Trust, Rightmove, and Fundsmith Equity.

Hargreaves Lansdown

What it does: Hargreaves Lansdown is a United Kingdom-based digital wealth management service administering company.

By Paul Summers: The share price of Hargreaves Lansdown (LSE: HL) has been in awful form in 2022 and it isn’t hard to fathom why. 

At a time when most people are just trying to pay their energy bills, it was inevitable that revenue at the company would suffer. Combine this with a reduction in new business and assets under administration and the 35% fall, while severe, makes some sense. 

Even so, I do think this is shaping up to be an attractive contrarian play. A price-to-earnings (P/E) ratio of 17 isn’t screamingly cheap but it does seem a very enticing price for a company that generates some of the highest margins in the FTSE 100. Moreover, the desire of many to take more control over their finances will surely prove a decent growth driver for years to come. 

In the meantime, there’s a 4.7% forecast yield in the offing.

Paul Summers has no position in Hargreaves Lansdown

The post Best British growth stocks for October appeared first on The Twelfth Magpie.

Smithson Investment Trust (LSE: SSON) has crushed the market’s performance over several years. And following the investment trust‘s strategy could help me beat the market as well. The method can be distilled into three simple steps (more on that below).

Between October 2018 and December 2021, the Smithson share price increased by about 97%. But the trust got caught in the recent bear market and the stock dropped by about 22% over the past year.

Nevertheless, Smithson beat the market. The company invests in small- and mid-cap companies with market capitalisations between £500m and £15bn. And as a comparison, the UK’s FTSE 250 index rose by roughly 20% while Smithson was outperforming. And over the same period, the FTSE AIM All-Share index gained around 22%. However, Smithson does invest in markets all over the world.

But Smithson left the UK’s mid-cap and small-cap indices in the dust. So how did it do this? Well, let’s first look at what the company doesn’t do. It doesn’t invest with borrowed money. It doesn’t hold more than between 25 and 40 stocks. It doesn’t use short-term trading strategies. And it doesn’t use derivatives. Smithson achieved its gains the old-fashioned way — by simply selecting, buying and holding stocks with money it already had.

Step 1 — a focus on compounding

It focuses on investing in businesses that can compound in value over many years. And that’s the first step I’d follow to try to beat the market. The trust looks for companies with an “established track record of success.” For example, an investee business might have already established a dominant market share for its products and services. Or it could have brands or patents that competitors would find difficult to replicate. 

Smithson aims to identify businesses with “strong” profitability that’s sustainable over time. And it looks for “substantial” cash flow that businesses can reinvest into operations. 

Step 2 — fair valuation

A key part of Smithson’s strategy is to seek a fair valuation before buying any stock it identifies as a candidate. So, the second step I’d follow is to focus on valuation. As part of this, it avoids businesses with lots of debt. And it shuns firms that rely on debt to provide an adequate return. It also skips past businesses in sectors and industries that innovate “very quickly and are rapidly changing”.

Instead, Smithson aims to pick enterprises that have demonstrated an ability to continue outperforming competitors. And that approach leads the trust to find value in companies that “rely heavily” on intangible assets. For example, in industries such as information technology, healthcare and consumer goods. 

Step 3 — a long-term approach to investing

Having found great long-term compounding business selling at fair valuations, Smithson aims to hold their shares for years. And step three for me is to take a long-term approach to my investing. And that’s so that operational progress in each business can compound over time while the shares are in my portfolio.

There are no guarantees of a decent long-term investment outcome for me, even if I follow Smithson’s three-step strategy. However, just in case I can’t do it as well myself, I also have an investment in Smithson Investment Trust!

The post A 3-step way to help crush the market with this investment trust  appeared first on The Twelfth Magpie.

That’s why I’ve been adding to my positions in some investment trusts over recent weeks (or strongly considering doing so).

Scottish Mortgage Investment Trust

One of the most high-profile casualties of 2022 so far has been Scottish Mortgage Investment Trust (LSE: SMT). Shares are down 37%.

Taking a ‘glass-half-full’ approach, this does at least give me a chance to add to my position. When the stock market recovery comes, I’m confident it’s the quality growth stocks that Scottish Mortgage holds — including Amazon, chip-making manufacturer equipment ASML and luxury goods firm Kering — that will do very well.

Clearly, this might take a while. Inflation has the potential to temporarily dent the earnings of at least two of the three companies mentioned above. Some holders may also be anxious about the recent departure of co-manager James Anderson.

Notwithstanding this, it’s hard to be bearish on a trust that’s double the price it was five years ago, even after this year’s big fall. A 0.34% ongoing charge is great value in the active management space too.

I fully intend to buy some more SMT in June.

Montanaro European Smaller Companies Trust

One investment trust I’ve already been topping up on has been Montanaro European Smaller Companies Trust (LSE: MTE). That may seem like a brave (or foolhardy) decision, considering what’s happening in Ukraine. However, I’m of the opinion that a lot of the damage has already been done. The trust’s value has tumbled 37% in 2022 so far.

Again, it’s the long-term returns that I’m more bothered about. While past performance doesn’t guarantee anything, a 75% increase in MTE’s share price since 2017 does suggest that manager George Cooke is a great stock-picker.

Indeed, part of the reason for the trust’s success is that he is able to snap up shares that the majority of market participants aren’t willing, or able, to research. This leads to price inefficiency. And that’s where true wealth-building lies.

Yes, there could be more bumps ahead. The ongoing charge of 1.2% is also high. However, I’m confident the superior performance of MTE over the next few decades will make up for this.

Smithson Investment Trust

Similar to MTE, I’ve been continuing to increase my position in Smithson (LSE: SSON). This is despite it giving up a lot of the gains it amassed since the Covid-19 crash of 2020.

Just like its big brother Fundsmith Equity, Smithson aims to buy quality stocks at reasonable prices and then do nothing. Given just how far shares have fallen, I’m pretty sure manager Simon Barnard has been rubbing his hands at the opportunities currently available to him.

That said, quality stocks rarely go for bargain prices and there’s a potential for portfolio members like Rightmove and Fevertree to continue falling if investors remain skittish about the macro-economic picture.

Even so, I remember not taking advantage of Smithson plummeting in value in 2020 only to deeply regret it later. I’m determined not to make the same mistake again.

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Great start

Don’t mistake me for some kind of stock market masochist. No one actually enjoys seeing the value of the biggest holding in their Self-Invested Personal Pension (SIPP) fall by a double-digit percentage. In fact, Smithson’s decline has the potential to hurt more than most. given that investors like me have been spoiled by performance for the majority of its existence. 

The small- and mid-cap-focused fund was launched back in October 2018. No doubt helped by its link to star money manager Terry Smith (Smithson comes from the Fundsmith stable and adopts the same strategy), investors were queueing up to throw their money in the ring. And up until recently, this confidence has been richly rewarded. 

From inception to the end of 2021, the trust delivered an annualised gain of 24.5%. That compares very favourably to the 13% achieved by its benchmark — the MSCI World SMID Index. It also more than justified the 0.9% annual management charge, in my opinion.

What’s gone wrong?

The recent wobble may be due to a number of things. First, there’s the issue of valuation. As a quality-focused fund, Smithson doesn’t look for cheap stocks.

Like its big brother, Fundsmith Equity, it targets companies with valuable brands and huge market shares that generate consistently high returns on the money they put to work. This includes property website Rightmove, mixer-drinks supplier Fevertree Drinks and Domino’s Pizza Group. Unfortunately, such businesses are rarely without friends and priced accordingly. That’s fine when markets are behaving themselves. Less so when investors are fretting over earlier-than-expected interest rate rises.

The fact that almost half of Smithson’s portfolio comes from the IT sector probably doesn’t help either. By sharp contrast to last year, companies in this space have now fallen out of favour. Thankfully, Smithson makes a point of avoiding the unprofitable fluff whose share prices are now falling faster than Boris Johnson’s approval ratings. Nevertheless, investors seem to be throwing the baby out with the bathwater.

The aforementioned performance of its shares may have also seen a few profit-takers emerge from the shadows. After all, Smithson’s market-cap had grown to £3.5bn by the end of December. That’s already pretty large for a trust that is designed to invest in companies lower down the food chain. In fact, the median size of business in the portfolio is actually £10bn! Moreover, manager Simon Barnard’s investment strategy is still to be comprehensively tested and some people may be getting out while the going’s good.

Loading up for the recovery

While I wouldn’t mind being proven wrong, I certainly don’t expect Smithson’s annualised return to remain at the percentage it stood at in December. As a fuss-free way of accessing high-quality businesses from around the developed world however, it still strikes me as a perfect core holding.

I believe that good businesses tend to outlive bad ones. I also regard myself as a long-term growth investor. As such, it makes sense for me not to panic about Smithson’s sticky patch just yet.

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