The sell-off in global markets in 2022 so far has caused panic among traders. For me, however, it’s simply been an opportunity to snap up stock in what I think is one of the best investment trusts around.
My latest investment trust buy
The latest addition to my Self-Invested Personal Pension is Montanaro European Smaller Companies Trust (LSE: MTE). Allow me to explain why.
If I’m to seriously grow my wealth, I arguably need to have some exposure to small-cap stocks. Minnows have the potential to grow at a faster clip than market giants, compounding my money at a fast rate. The best bit is that smaller companies aren’t heavily followed, regardless of their quality. That makes for a fertile hunting ground for managers like MTE’s George Cooke.
The trust’s track record speaks for itself. MTE achieved a 32.8% return in 2021. Unsurprisingly, this thrashed the still-very-respectable 15% of its benchmark. Personally, I think this performance justifies the undeniably steep 1.2% ongoing charge.
Unfortunately, this performance has reversed in 2022 so far. The share price has fallen 23% year-to-date as I type. That screams ‘opportunity’ to me.
What’s in the fund?
MTE’s biggest holdings are circuit board producer NCAB, software provider Esker and business applications supplier Fortnox. Interestingly, the trust has almost a third of its assets invested in Swedish companies. German businesses represent 15% of the portfolio with France, Switzerland and Italy taking up roughly 10% each.
Another thing worth noting is just how many (or few) businesses make up the portfolio. Based on its most recent factsheet, MTE comprises just 57 holdings. That’s fairly concentrated for an investment trust that’s focused on the lower end of the market spectrum.
Worth the risk?
So, what might go wrong from here?
Obviously, there’s a possibility that the price of this investment trust may continue falling in 2022. A stuttering post-pandemic economic recovery or a dash to safety due to interest rate rises could shake out more investors. And the crisis on the Russia-Ukraine border won’t exactly attract capital to the region. Even if the markets do recover quickly from this year’s wobble, there’s no guarantee that European stocks will keep up with other parts of the world either.
More generally, the Montanaro European Smaller Companies Trust may struggle to repeat its stellar returns going forward. Since smaller companies are inherently less liquid (harder to buy and sell), MTE’s share price could be more volatile too.
Long term focus
To mitigate this risk, I’ve kept some powder dry with the intention of adding to my holding further down the line. Of course, there’s the potential for this to backfire if the MTE’s share price rises from here. However, it’s psychologically much easier for me to build a position in tranches rather than go all-in from the outset.
Another thing I’ve done is to stay diversified. This includes staying invested in other funds, such as FTSE 100-listed Scottish Mortgage Investment Trust. There’s no overlap in holdings between this and the small-cap fund.
Last, I’ve also been reminding myself that this is intended to be something I retain for years and possibly decades. Having this time horizon means there’s little point in me getting too worried about market moves of the kind we’re seeing right now.
