Two trusts that soared and then sank. Should we sell while we’re still in the black?

Blackrock Throgmorton more than doubled after our tip in 2020 but then almost halved and Schroder UK Mid Cap has had a similar journey

In April 2020, when the markets were close to the low point of the coronavirus crash, we tipped two investment trusts that seemed oversold and poised to recover. They did so handsomely but have now given up most of their gains. Should we bank those profits and sell, in fear that the falls will continue, or should we hang on – or even buy more? Both trusts, Schroder UK Mid Cap and Blackrock Throgmorton, which also favours small and medium-sized companies, peaked in early September last year at 81pc and 113pc above our tip prices respectively. But now our gains are just 22.3pc for the Schroder fund and 20.4pc for Throgmorton.

“This has been one of the worst periods for smaller stocks I can remember,” says John Husselbee of Liontrust, who drew our attention to the two trusts in 2020. “In fact the situation now is similar to when we spoke about them then: that time, when markets had sold off because of Covid, smaller stocks suffered more; the same is true this time, when investors have taken fright over inflation, interest rates, recession and war. Smaller stocks have suffered quite a fall relative to their profits, more so than larger businesses.” Of course, falls in the share prices of smaller stocks can be amplified when you hold them via an investment trust because the discount can also widen.

Husselbee says inflation and higher interest rates led to a “derating” – a fall in valuation relative to profits

– in the growth stocks that both portfolios hold, while fears of recession are especially damaging for smaller companies, which may be less geographically diversified and less able to raise new money. And when investors feel frightened, they often seek safety in the big, familiar household names.

But the travails of smaller stocks are only a more extreme version of what has afflicted all financial markets. The stance of central banks has been turned on its head since we tipped these trusts in the early days of the pandemic. Then, near-zero interest rates and injections of vast sums into the financial system and economy were hugely supportive of share prices. Now the central banks are raising interest rates and switching from QE to its opposite, QT or quantitative tightening, which takes money out of the economy. In essence, Husselbee says the severe falls suffered by the two trusts are the result of circumstances and nothing to do with poor decisions on the part of their managers.

“These two funds have remained consistent to their investment style and process. This is what we look for and this is the way to get consistency in returns – although that consistency shows itself only in the long term,” he says.

In other words, no matter how good the managers, a sudden change in the external environment can knock their funds off course in the short term, just as we have seen. “You still want to back good managers and I don’t think anything has changed in the way these trusts are run,” he adds.

He says the case for owning them depends on a belief in the “small cap premium”, the idea that smaller companies can grow faster than larger ones and therefore make better long-term investments. It’s a belief Questor shares, and Husselbee says: “If you believe in the small cap premium these trusts will deliver – the question is when.”

A sense among investors that the peak in inflation and interest rates is in sight is likely to get them buying again, he says. Meanwhile the trend towards “deglobalisation” as the world splinters into rival camps and as companies and governments focus more on security of supply should favour smaller companies, although this is a “generational, not a short-term” shift.

“If you’re a contrarian and looking for value, these trusts fit the bill,” Husselbee says. “A recovery in markets generally could lead to a recovery in the small cap premium.

“The recent fall almost back to where these trusts were in 2020 looks like another opportunity to get in on the ground floor.”

Our advice to anyone who already has either trust is to hold on. For those with money to invest and the ability to wait for recovery, they are a buy.

Questor says: buy

Tickers: SCP, THRG

Share prices at close: 538p, 590p

Read Questor’s rules of investment before you follow our tips: telegraph.co.uk/go/ questorrules; telegraph.co.uk/questor