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My favourite UK stocks are FTSE 100 Index A team with a market capitalisation of almost £30bn. Yet it never seems to be on many people's radar. However, it's very much on mine.
I'm talking about private equity and infrastructure specialists. Group 3i (LSE:III). Whenever I have looked at 3i shares, they have been on the up. So when I moved some company pensions into a self-invested personal pension fund (SIPP) last year, it was one of the first shares I bought.
3i Group is now the largest direct equity holding in my portfolio, up 56% since I added it to my SIPP on 3 August last year. And this is not a one-off.
High performance company
The investment fund is the fourth best performer in the FTSE 100 over the past year, up 52.85%. Over five years, it ranks third, up 172.42%, second only to Fraser Group (up to 280.98%) and Diploma (190.59%).
This is particularly impressive given that private equity is going through a tough time as higher borrowing costs impact fundraising, transactions and exits.
However, this does not seem to have affected 3i Group. The 2023 financial year results showed a total return of £3.84 billion, equivalent to 23% of shareholders' opening funds. This figure is lower than the 36% return of £4.86 billion in 2023, but still quite solid. 2024 has also started quite well.
The group has liquidity of £1.3 billion, including £336 million in cash and £900 million in an undrawn revolving credit facility. Net leverage is surprisingly modest at 4%.
My first concern is that its outperformance has been boosted by a highly successful investment, the Dutch non-food discount chain Action. It is booming with 2,300 stores in 11 European countries. Last year, it generated a gross return on investment of £3.7bn, or 33%. Action now accounts for 31.32% of its portfolio.
Power of three
3i Infrastructure plc is the fund’s second-largest holding at 8.53%. However, it has lagged behind the rest of the portfolio, which has impacted overall performance.
3i's share price has been stagnant of late and I don't expect it to suddenly take off. These are tough times for the US and European mid-cap M&A market in which it operates. I'm prepared for a less spectacular performance going forward, but I still think it can continue to outperform the FTSE 100.
Dividends are on offer, as well as growth. 3i's cumulative yield is a modest 2.01%, but that's largely due to the rise in its share price. The board is forward-thinking, and increased the most recent annual payout by 15% to 61p a share.
My biggest concern is the current sky-high valuation, with the trust trading at a whopping 37.86% premium to net asset value. Management has a brilliant track record stretching back to 1945, but the risk/reward ratio seems a little skewed. Especially as 3i now accounts for almost 10% of my total SIPP.
I won't buy any more at the current high price, but I won't sell what I have. Instead, I'll let it run and run. I still believe in the power of the 3i group.
