"Invest in British stocks now"

According to Terry Tanaka, two of the BFIA's preferred investment trusts are the best places to begin investing in UK stocks

The FTSE 100 index is expected to surpass 10,000 for the first time in 2026 as a result of the global corporate earnings trend. Even though equity markets have been steadily rising, UK investors have been remarkably hesitant to invest: two-thirds of all ISA savings are in cash ISAs, and two-thirds of savers think investing is too risky.

Even though the outlook for the domestic economy is still bleak and a fiscal crisis is widely feared, savers' risk aversion should begin to decrease as investors begin to discount a shift to a government that is more hospitable to businesses and the stock market.

When there is room for discounts to net asset value (NAV) to decline, as there is now, investment trusts typically perform better than a rising market. Right now, their average is over 14 percent. Remorse over lost opportunities must be set aside as savers, whose real returns are being squeezed between declining interest rates and ongoing inflation, make the decision. Equity markets provide long-term returns, so investors shouldn't be discouraged by concerns about short-term volatility.

Where to begin investing in UK stocks.

The 13 billion Scottish Mortgage Investment Trust (LSE: SMT) and the 1 billion AVI Global Trust (LSE: AGT), two contrasting but complementary investment trusts, are a good place to start with the BFIA portfolio. While both invest internationally, AGT focuses on value investments, whereas SMT is primarily a growth trust.

SMT's five-year investment record is appalling, with a 27 percent return compared to the MSCI All Country World index's 75 percent return. However, this also includes the catastrophic year ending in June 2022, during which the index fell less than 5% and NAV and share prices fell 39% and 46%, respectively. It could be argued that the managers were overconfident after five years in which the NAV more than quadrupled while the index barely doubled.

Following a dip in May 2023, the share price and NAV began to rise again. Since then, the share price has nearly doubled thanks to SMT's aggressive share repurchases, which have also helped to narrow the discount to NAV. Even though the share price and NAV returned 34% in the year ending August 31st, compared to just 13% for the index, the shares are still trading at an 8% discount to NAV.

With a 90 percent investment return over five years, but only a respectable 12 percent over one, AGT has blazed a much more stable path. Earlier this year, the share price fell 1520% in a few months, but its strong performance and generally low volatility account for the shares' 6% discount to NAV.

"To find, acquire, and assist the most outstanding growth companies in the world" is SMT's stated mission. It acknowledges that many of these are not quoted since businesses are entering the market later in their development due to the easier access to private capital. It thinks that if it limited itself to public equity, fantastic opportunities would be lost or invested in too late. The 30% portfolio limit for private equity was a problem in 2021 - 2022, when the quoted company holdings' share prices dropped sharply and a growing discount of its shares to NAV led to pressure to buy back shares. Private equity now makes up 26% and has 51 companies under its ownership. This includes Elon Musk's business venture, Space Exploration Technologies, which includes Starlink and has the largest stake (7.8%).

ByteDance, the owner of TikTok and the sixth-largest holding in the portfolio at 3:5%, is also not quoted. MercadoLibre, Amazon, Taiwan Semiconductor, and Meta are the largest of the 47 listed holdings that comprise the remaining 73% of the 15 billion portfolio, excluding 1% of net liquid assets. Although £1.06 billion in borrowings, or 11% of net assets, suggest optimism about the future, they will also limit additional investment.

Different types of investment trusts.

9 percent is a low portfolio turnover rate; SMT's guiding principle is to run its winners. It has increased its investment in Tesla (now less than 1%) by 21 times and in Nvidia (a top-10 holding) by 100 times. In the past ten years, however, it has lost everything on up to seven investments. Its managers point out that you can make more money on a profitable investment than you can on a poor one.

AGT's expectations are considerably less pessimistic about the downside and far more realistic about the upside of each investment. Its approach to value differs greatly from merely looking for recovery or inexpensive shares globally. Approximately 40% of the portfolio is allocated to holding companies, which are typically family-controlled and have a much lower total value than the sum of their individual parts. News Corp, which is owned by the Murdoch family, and Vivendi, which is owned by Vincent Bollor, are two examples of media and entertainment companies.

These companies have substantial underlying growth, but investors believe the controlling shareholders are more interested in building empires than creating value, which is why they are undervalued. Private-equity specialists Chrysalis, Oakley, and HarbourVest are among the closed-end funds that hold a substantial discount to NAV, accounting for another 31% of the portfolio. Once more, these investments have substantial underlying growth, but investors are dubious.

Japan (21 percent), Korea (6 percent), and property/other (2 percent) make up the remaining 29 percent of the portfolio. About ten years ago, AGT saw a big opportunity in Japan, where many businesses were trading at extremely low asset values and their managements were complacent and uninterested in attracting outside investors.

To shake up the corporate sector, Prime Minister Shinzo Abe (20122020) implemented reforms, which gradually started to pay off. Although Japan has remained a significant and profitable focus for AGT, AVI established a distinct trust, AJOT, in 2018 to specialize in value investing in Japan. AGT was encouraged to invest in Korea this year when the country implemented comparable corporate reforms. The opportunity is substantial, as it has found 600 companies that are trading at a median price-to-book ratio of 0.7 and a median of 71 percent of their valuation in cash and listed securities.

How come you chose both investment trusts?

An activist investor is not what AGT is. Instead of taking an adversarial stance in a flurry of publicity, it aims to convince business executives to realize value for shareholders. Though a 36% gain after four months of owning Jardine Matheson indicates that this is not always required, it is willing to write open letters to management, interact with other shareholders, and exercise patience.

The debt-to-net-asset ratio of 9 percent for AGT is comparable to that of SMTs; however, only 16 percent of the portfolio is invested in North America, while SMT's is 55 percent. Its portfolio is significantly more growth-oriented than a conventional "value" portfolio, but it is far less technology-oriented than SMTs. It's unclear who will win in the long run, unlike in Aesops' fable, but AGT and SMT are comparable to a tortoise and a hare. SMT is currently favored by markets and momentum, whereas AGT is making steady progress, though things can change. For this reason, both are included in BFIA's investment-trust portfolio.