Global equity markets can offer an abundance of growth opportunities. The ability to embrace some additional risk in pursuit of premium returns is always enticing and, over the last decade or so, investors have generally been well rewarded for doing so. Here, we take a look at some of the best investment trusts for growth investors, along with some guidance on how to avoid the pitfalls.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Risk and reward
The age-old relationship between risk and return is one of the most reliable and enduring features of the investment world. The equity asset class as a whole is more risky than other asset classes such as bonds and cash, because capital values can be more volatile, and investors must be prepared to tolerate potentially larger short-term losses. No asset class is entirely risk free, however, and history demonstrates that investors have ultimately been rewarded for taking additional risk.
Emerging markets
Within the equity asset class, some regions and strategies can be viewed as riskier – and therefore potentially more rewarding in the long run – than others. Investing in emerging markets, for example, is seen as more risky than investing in developed markets such as those of Europe and North America.
The higher rates of economic growth that can be achieved by emerging markets tends to mean that companies are capable of growing faster, and collectively, that can drive higher stock market returns. These markets tend to be more volatile, however, and can endure long periods when they are out of favour. Ultimately, however, there is plenty of growth potential for long-term investors to target.
History can be a useful guide to what we should expect from markets as they emerge, because they tend to follow a well-trodden path towards economic prosperity. The process takes a long time to unfold, but by looking at the experience of more mature emerging markets – for example, the likes of China, India, South Korea and Brazil – we can identify what is likely to happen to the next generation of developing economies. It is in these “frontier markets” that we can find some really exciting growth potential.
This is the opportunity that the Blackrock Frontiers Investment Trust plc aims to capture by investing in growth businesses within the world’s most dynamic, fast-growing countries such as Indonesia, Hungary and Chile. Not only do these markets possess substantial long-term growth potential, but they also possess internal momentum that makes them uncorrelated to global markets. This means they can be a really useful way of adding diversification to a portfolio and are capable of delivering performance at times when other markets are struggling.
Closer to home
We tend to think first of Asia and Latin America when looking for emerging market exposure, but growth opportunities can be found closer to home as well. For example, Europe is a continent that can often surprise for its innovation and dynamic capitalism. The Blackrock Greater Europe Investment Trust plc, for example, is another of Blackrock’s growth investment funds. This trust has a broad remit which allows the investment team to capture growth opportunities in the less well known parts of Europe, as well as mainstream economies such as Switzerland, France and Germany. The portfolio managers are keenly focused on the quality of the companies they invest in, which can be a very effective risk mitigation technique when investing for growth. This means the team looks for companies with strong balance sheets, good management teams and an excellent track record on capital discipline and shareholder returns.
Small is beautiful
Another source of premium returns that has been evidenced in a number of academic studies over the years, is the so-called “size effect”, where smaller companies outperform larger companies.1 As is the case with emerging markets, the size effect obviously doesn’t lead to outperformance every year, and indeed there can be long periods when the size premium fails to materialise. Over the very long term, however, the extra runway of growth that smaller companies possess, coupled with their flexibility and agility, has ultimately led to meaningfully higher rates of growth.
In turn, this higher growth has often been reflected in a premium valuation. Across many regional stock markets, smaller companies currently trade at a discount to their larger counterparts, which could make this a compelling long-term opportunity for growth investors to consider.
Domestic investors may also be interested to find that the UK is currently among the cheapest of the world’s regional stock markets.2 As a vibrant and dynamic market, the UK smaller company sector is therefore potentially an attractive destination for investors and Blackrock has two growth investment trusts targeting this opportunity.
The Blackrock Smaller Companies Trust plc seeks out the fastest growing, most innovative and exciting companies from the available universe of UK growth stocks. Like the Greater Europe fund, the portfolio manager focuses on quality businesses in order to mitigate risk. The focus is on finding overlooked businesses that are capable of shaping their own futures, regardless of the wider economic environment. Risk is also mitigated through a diversified portfolio which typically consists of around 100 holdings.
Meanwhile, Blackrock Throgmorton Trust plc also focuses on the attractive UK smaller companies market niche. The portfolio manager adopts a high conviction approach, seeking businesses with good management teams and dominant market positions. This trust also has the opportunity to enhance growth potential through short positions in business that the portfolio manager deems to be unattractive, enabling the trust to benefit if their share price falls. This requires a strong control framework to mitigate the additional risk, but it does represent a source of enhanced return potential for adventurous growth investors.
Hidden gems
Blackrock has an attractive range of investment trusts seeking capital growth, each of which looks to capture a specific opportunity across global markets. One thing that unites them all is their focus on under-researched, inefficient parts of the market. The lack of research coverage in these less well explored parts of the market means that attractive opportunities can be overlooked. Blackrock’s talented stock pickers are prepared to undertake the hard work that is involved with unearthing these “hidden gems” and build portfolios that have considerable long-term growth potential.
As is always the case, with growth investing, it is not without risk. But the long history of financial markets suggests the rewards ultimately justify the additional risk.
For further details about Blackrock’s full range growth investment trusts, please visit our Global Growth Opportunities content hub.
