Investment trusts can be a great way to gain exposure to the stock market. Not only do these products provide instant diversification, but they’re also typically very cost-effective.
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.
