I am considering adding the Blackrock Throgmorton Trust (LSE: THRG) to my portfolio to get broad exposure to smaller UK companies. But it’s not just stock portfolios that I can get exposure to by buying trusts. By owning The Renewables Infrastructure Group (LSE: TRIG), I get access to income and electricity-generating assets in the renewable energy space.

UK small-cap stocks

The manager of Blackrock Throgmorton seeks the highest-quality growth stocks in the UK small-cap space for its portfolio. The trust also takes short positions against companies that are likely to underperform, which differentiates this trust from its competitors.

Performance has been good in the long term. Over the last 10 years, the trust has returned 252% versus 130% for its benchmark. However, last year the BlackRock Throgmorton share price declined by 38%. That was due to growth underperforming in a time of rising interest rates and inflation. A modest amount of gearing also amplified losses.

Using data from Morningstar, I can see that the trust’s estimated net asset value (NAV) per share is 631p. The Black Throgmorton Trust share price is around 612p. That means that BlackRock Throgmorton’s portfolio is selling for about 3% less than what it is judged to be worth. And with that track record and some signs that inflation is abating, I think it is positioned to do well. I plan to start building a position this year.

Investing in renewable energy

The Renewables Infrastructure Group invests mainly in wind farms, but also solar and battery storage assets in the UK and Europe. It generates income from selling the electricity these assets generate. Inflation should gently nudge its revenues from existing operations higher over time. Plus the company continually seeks to add more revenue-generating assets.

The UK government’s windfall tax on electricity generators will drag on income in 2023 and 2024, possibly stalling dividend growth and putting pressure on the share price. But beyond 2024 I think that dividend growth will return. And since the renewable energy industry shows no sign of slowing its growth, I am happy to hold it in my portfolio for the long term. Its share price has grown by 113% since 2013, and I hope it can repeat that kind of performance.

Scottish Mortgage Investment Trust

Scottish Mortgage invests in companies that are bringing transformational technologies, products, and processes to market. It chases high growth but holds for the long term to realise it. Some of these investments are in unlisted companies, and overall the portfolio is rated as a six on a seven-point risk scale according to company literature.

That risk was highlighted last year when the company’s share price dropped 45.7% as the market turned away from growth stocks. But the rewards can also be great. Over the last 10 years, the Scottish Mortgage share price is up 421%. As with BlackRock Throgmorton, if inflation eases and rates stop rising, growth should come back into favour, making Scottish Mortgage a solid choice in 2023 and beyond for my portfolio.

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I normally try to use as much of my ISA allocation as feasible at the start of each tax year. Indeed, studies demonstrate that using as much of the allowed amount as feasible, as early as possible, can result in higher tax-free returns.

However, at the end of the day, what counts most is my financial status. It’s not the end of the world if I can’t come up with the whole limit at the start of the tax year. Since there are no restrictions on when I may invest in a Stocks and Shares ISA, I can continue to invest regularly throughout the year. The amount of money I can save during the tax year is the sole restriction and is capped at a maximum of £20,000.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Choosing Stocks and Shares ISA investments

I’d search for both income and growth options while shopping for assets for my ISA. These, I believe, will allow me to balance the portfolio with a range of different stocks and income methods that should add to its value in as many ways as possible.

I’d also seek a combination of mutual funds and individual equities. BlackRock Throgmorton (LSE: THRG) is now one of my favourite investing funds. This trust invests in small-cap growth stocks in the hopes of outperforming the market. It also pays a small 1.3% dividend yield at the time of writing.

I believe it offers the ideal combination of development and income to meet my ISA objectives.

This trust does, however, impose a performance fee in addition to a usual management fee. In the long term, these fees may eat into my profits. And if the fund doesn’t choose the correct assets, the results might be far worse. These are the major dangers and problems of investing in the stock market through an investment trust.

This is why, for my Stocks and Shares ISA, I would also select a few shares from specific companies I believe to be safer bets.

Single stocks to buy

BAE Systems and Vodafone are two stocks that I would consider purchasing. These firms are attractive income opportunities, with dividend yields of 4% and 6%, respectively. They’re also benefiting from growth tailwinds. Increased defence spending should improve BAE’s sales and earnings. Meanwhile, Vodafone may benefit from the increasing availability and necessity of mobile data.

As time goes on, these businesses may encounter challenges such as increased expenses and competition, which might eat into profit margins. However, given their long-term development and income potential, I believe these companies would be excellent additions to my tax-efficient portfolio.

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FTSE 250 bound?

The BlackRock Throgmorton Trust (LSE: THRG) is the fund in question. Its aim is simple. To provide investors with capital growth by putting the vast majority of assets to work in small- and mid-cap UK companies. There’s some exposure to overseas markets such as the US, France and Australia in there, but this is primarily a play on the British economy. 

According to its latest factsheet, the trust owns some of the best-performing stocks on the London market over the last year. Luxury timepiece retailer Watches of Switzerland is among the 10 biggest holdings, as are data analytics firm YouGov and Impax Asset Management. Lockdown winner Pets at Home and veterinary services provider CVS Group also feature. 

THRG’s sector allocation is rather contrarian too. It’s heavily exposed to industrial, consumer discretionary and financial shares. By contrast to, say, FTSE 100 member Scottish Mortgage Investment Trust, the number of technology-focused stocks is low at just 8%. For me, this makes Throgmorton’s gains all the more impressive.

So just how well has it done?

In the last year, the trust’s share price has climbed an impressive 61%. Out of interest, the FTSE 250 index that Throgmorton might end up joining achieved 33% over the same period. The latter is clearly far from a bad result, considering the impact of Covid-19 on businesses up and down the UK. Even so, this huge difference does show the value that experienced stock pickers can bring. 

Over a longer timeline, THRG’s outperformance is even more noticeable. The investment trust returned has delivered a staggering annualised return of 27.9% over the last five years. The Morningstar IT UK Smaller Companies benchmark has managed ‘just’ 14.6%. 

Things to remember…

As superb as the performance of this investment trust has been in recent years, I must bear a few things in mind. 

First, there’s no guarantee that recent gains will be repeated. In fact, a slowdown in the UK recovery might lead to a reversal in Throgmorton’s performance. The portfolio does include quite a few highly-rated stocks. These are often some of the first to be jettisoned when sentiment turns.

Second, investment trust share prices — especially those with a small-cap focus — can still be volatile. Minnows may possess the potential to generate better returns than top-tier blue-chips over the long term. Unfortunately, the journey to riches tends to be bumpier due to their relative illiquidity. That said, THRG does possess the ability to ‘short’ companies. So perhaps the downside might be more contained than at other similar trusts?

Third, it should never be forgotten that investment trusts levy fees. Throgmorton’s ongoing charge is currently 0.6%. Yes, the payment of a dividend does help to offset this. However, this is clearly a more expensive option than simply buying a set of promising stocks and sitting back. 

Cautious buy

Notwithstanding the above, I do think this investment trust could still occupy a space in my risk-tolerant portfolio. Also bear in mind that funds tracking the FTSE 250 will have to buy once its value breaches the FTSE 250 threshold. This should provide further support to the THRG share price and make it more appealing to me.

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Here, I’m going to highlight three investment trusts I’d buy for growth. All aim to generate strong long-term returns for investors by investing in higher-growth companies.

My top investment trust for growth

My top investment trust for growth, considering both risk and reward, is Monks (LSE: MNKS). It’s run by Scottish investment manager Baillie Gifford. Its aim is to generate capital growth over the long term by investing in global equities.

There are a few reasons Monks is my top pick for growth. One is that it has a great track record. Over the five years to 31 March, its net asset value (NAV) rose 176%, versus 104% for the FTSE 100 World TR index.

Another reason is the trust’s portfolio is well diversified. It has plenty of exposure to technology (Amazon, Microsoft, and Alphabet are the top 10 holdings), however it also has exposure to other growth industries.

One risk to consider here is the trust’s bias to US stocks. So it could underperform if the US market takes a hit.

Overall however, I think it’s a very sound pick for growth.

Incredible returns

Of course, I can’t talk about growth-focused investment trusts and not mention Scottish Mortgage (LSE: SMT). It’s delivered phenomenal returns for investors in recent years. For the five years to 31 March, its NAV rose 391%.

I like this trust a lot. However, I see it as higher risk than Monks. This trust tends to make big bets on certain stocks. This can pay off at times, but it can also backfire if the stocks fall.

Another reason this trust is riskier is that it has large positions in Chinese tech companies, such as Tencent (its largest holding) and Alibaba. These kinds of companies have a high level of regulatory risk as Chinese regulators are cracking down on big tech businesses.

Considering the risks, I see this trust as more speculative in nature. I’d only invest a small proportion of my overall portfolio in it.  

UK growth companies

Finally, a third investment trust I’d buy for growth is BlackRock Throgmorton (LSE: THRG). This is a high-conviction trust that invests in small UK growth companies. It’s performed very well in recent years, returning 166% (NAV return) for the five years to 16 July.

This trust owns some top UK companies. Some of the stocks in the top 10 holdings include Gamma Communications, Impax Asset Management, Games Workshop, and Watches of Switzerland. Overall, the holdings are very different to those of Monks and Scottish Mortgage, meaning this trust could potentially provide portfolio diversification.

One downside is that it has a performance fee. This means that if performance is strong, the fees could be higher than those of some other growth-focused investment trusts.

Overall though, I see it as a good way to get small-cap exposure.

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The FTSE 100, considered to be the a leading indicator of UK stocks, hasn’t had the best starts to 2018 either — it’s broadly unchanged since the start of the year. That’s because, besides ongoing uncertainty about the UK’s long-term relationship with the EU, worries over global trade and the prospect of an interest rate hike later this year have weighed heavily on the share index.

Outperforming the FTSE 100

Still, there may be some value to knowing which funds have been significantly outperforming the FTSE 100 so far this year. This short period is significant because, whether you’re a trader or a long-term investor, the first six months can give some meaningful clues about where the market could be headed next.

For example, sector funds which are leading the market right now can tell us about investible themes and help us to identify bullish trends. Meanwhile, country-specific or regional funds can inform us about which markets are holding up better than the rest.

With this in mind, here’s a look at three investment trusts that have been outpacing the FTSE 100 so far this year. These may not the absolute top performers of the year, but I reckon they are among the most outstanding and insightful of the top-performing investment trusts in 2018.

Technology

Technology has, once again, been the standout sector in the market this year. And one fund in particular which has really taken off is the Allianz Technology Trust (LSE: ATT).

Driven by stocks such as Amazon and Netflix, which have gained 50% and 118%, respectively, since the start of the year, the Allianz Technology Trust is up by just under 30% so far. This performance compares favourably not only against the FTSE 100, but also against its benchmark index, the Dow Jones World Technology Index, which returned only 15% over the same period.

Strong earnings expectations

Despite a wobbly start in the first quarter of 2018, the technology sector has picked up some steam in the second quarter. Buoyed by strong earnings expectations, technology stocks have shaken off much of the regulatory and protectionist concerns that had been holding them back earlier in the year.

Still, not everyone is enthused. Analysts from Morgan Stanley reckon that already priced into tech valuations is an expected strong earnings season, while sector valuations trade at a significant premium to the market even as uncertainty created by US tariffs (and the threat of retaliatory tariffs) looms large.

Track record

With the FTSE 100 having so few technology stock constituents, the Allianz Technology Trust is a particularly good choice for domestically-exposed investors to get more exposure to the technology sector. The fund has an impressive long-term track record of delivering attractive capital growth, with a five-year cumulative share price return of 260%.

Emerging markets

Surprisingly, another fund which also did particularly well since the start of the year was one which invested in emerging markets. Even as trade war anxiety ruffled on emerging equity markets, the Gulf Investment Fund (LSE: GIF) was one of the best performing funds after having delivered total shareholder return of 14% since the start of the year.

The fund, which seeks exposure to emerging investment opportunities in the Gulf Cooperation Council, or the GCC region, has no doubt benefited from the region’s much-improved economic prospects, which look a lot brighter thanks to rising oil prices.

Financial sector

But although the region is heavily exposed to the oil and gas sector, the fund manager is more keenly invested in the financial stocks, which account for 48.9% of its total assets. The utilities sector is its next biggest exposure, representing 9.6% of assets. This is followed by the energy sector, which represents a further 8.6%.

The fund’s investment adviser believes the GCC banking sector enjoys strong capitalisation and is well placed to benefit from increased infrastructure spending, improving economic growth, and favourable demographic trends. Banking stocks are also attractive due to strong government support for the sector and the recent string of rate hikes by the region’s central banks, which is expected to improve their profitability.

Certainly, the Gulf Investment Fund may not be suitable for all investors as the value of its investments can experience high levels of volatility. That said, as shares in the trust trade at a 15% discount to its net asset value (NAV), it may be worth a closer look for those with a bigger risk appetite seeking an undervalued opportunity.

UK smaller companies

Meanwhile, the BlackRock Throgmorton Trust (LSE: THRG) is a fund to consider for investors seeking to invest closer to home. Shares in the UK smaller companies investment trust have gained 18% year-to-date, making it one of the best-performing funds in the UK small- and mid-cap space.

Fund manager Dan Whitestone reckons there isn’t an industry that’s not facing some form of disruption and that this new wave of disrupters is changing consumer behaviour. As such, his strategy rests on identifying those companies that are disrupting established industries.

Holy trinity

Whitestone has a preference towards companies that have in place the “holy trinity” of a strong management team, a great product, and one that is operating in an attractive sector. The fund’s top five holdings at the end of May included Ascential, Dechra Pharmaceuticals, Integrafin, Robert Walters and Fevertree Drinks.

Fees for the BlackRock Throgmorton Trust are moderate, with an ongoing charges ratio (including performance fees) of 2.2% for its last financial year.

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Small caps

The BlackRock Throgmorton Trust (LSE: THRG) is classic case of a well-run investment trust going cheap right now. Over the past five years, this fund has produced a total return of 165% for investors, which compares favourably to the UK smaller companies benchmark performance of 148%.

Run by Mike Prentis and Dan Whitestone, who have been managing the fund together since 2008, it invests primarily in small- and mid-cap stocks listed on the London Stock Exchange. The top five holdings at the end of April included CVS Group, JD Sports Fashion, 4imprint Group, Dechra Pharmaceuticals and Cineworld Holdings.

The fund has a NAV of 513p per share, but trades at a price of just 429p. This indicates a discount of 16.4%, which seems unwarranted given the liquidity of its assets and its historic outperformance.

Diversified

With a low total ongoing charge of just 0.54%, Foreign & Colonial Investment Trust (LSE: FRCL) could be a savvy way to gain international exposure at a reasonable cost.

The fund’s discount may be more modest, at just 7%, but investors would benefit from the fund’s diversification, both in geographical terms and across different industries. This offers investors some downside protection from country- or industry-specific risks, which may lead to significant outperformance in the long run.

Foreign & Colonial is cautiously managed, with no single equity investment currently representing more than 2% of its total assets. The US is the top country exposure in the portfolio, with 38.8% of its total assets at the end of June (up from 35% in June 2013). Other sizeable exposure is to the UK, with 12.6% (down from the 29% it represented four years ago), followed by Japan, Ireland and Germany.

Private equity

The last investment trust worth mentioning is Standard Life Private Equity Trust (LSE: SLPE), which currently trades at a discount to NAV of 16.2%.

Private equity has been one of the fastest-growing and best-performing alternative asset class in recent years, but it is often closed off to retail investors. Investment trusts, such as this one therefore give retail investors rare access to an opportunity to generate higher absolute returns while improving portfolio diversification.

What’s unique about private equity funds is that they typically invest in unquoted companies that are in the developing stage or have under-tapped potential. The Standard Life fund holds a diversified portfolio of private equity funds, with a majority focused on European companies. 

There is at least one major downside though. Fees can be quite expensive — last year, the fund had an AIC ongoing charge of 2.33% when performance fees were included. Nevertheless, the fund still managed to deliver a total return performance of 161% over the past five years.

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