That’s why I’ve been adding to my positions in some investment trusts over recent weeks (or strongly considering doing so).

Scottish Mortgage Investment Trust

One of the most high-profile casualties of 2022 so far has been Scottish Mortgage Investment Trust (LSE: SMT). Shares are down 37%.

Taking a ‘glass-half-full’ approach, this does at least give me a chance to add to my position. When the stock market recovery comes, I’m confident it’s the quality growth stocks that Scottish Mortgage holds — including Amazon, chip-making manufacturer equipment ASML and luxury goods firm Kering — that will do very well.

Clearly, this might take a while. Inflation has the potential to temporarily dent the earnings of at least two of the three companies mentioned above. Some holders may also be anxious about the recent departure of co-manager James Anderson.

Notwithstanding this, it’s hard to be bearish on a trust that’s double the price it was five years ago, even after this year’s big fall. A 0.34% ongoing charge is great value in the active management space too.

I fully intend to buy some more SMT in June.

Montanaro European Smaller Companies Trust

One investment trust I’ve already been topping up on has been Montanaro European Smaller Companies Trust (LSE: MTE). That may seem like a brave (or foolhardy) decision, considering what’s happening in Ukraine. However, I’m of the opinion that a lot of the damage has already been done. The trust’s value has tumbled 37% in 2022 so far.

Again, it’s the long-term returns that I’m more bothered about. While past performance doesn’t guarantee anything, a 75% increase in MTE’s share price since 2017 does suggest that manager George Cooke is a great stock-picker.

Indeed, part of the reason for the trust’s success is that he is able to snap up shares that the majority of market participants aren’t willing, or able, to research. This leads to price inefficiency. And that’s where true wealth-building lies.

Yes, there could be more bumps ahead. The ongoing charge of 1.2% is also high. However, I’m confident the superior performance of MTE over the next few decades will make up for this.

Smithson Investment Trust

Similar to MTE, I’ve been continuing to increase my position in Smithson (LSE: SSON). This is despite it giving up a lot of the gains it amassed since the Covid-19 crash of 2020.

Just like its big brother Fundsmith Equity, Smithson aims to buy quality stocks at reasonable prices and then do nothing. Given just how far shares have fallen, I’m pretty sure manager Simon Barnard has been rubbing his hands at the opportunities currently available to him.

That said, quality stocks rarely go for bargain prices and there’s a potential for portfolio members like Rightmove and Fevertree to continue falling if investors remain skittish about the macro-economic picture.

Even so, I remember not taking advantage of Smithson plummeting in value in 2020 only to deeply regret it later. I’m determined not to make the same mistake again.

My latest investment trust buy

The latest addition to my Self-Invested Personal Pension is Montanaro European Smaller Companies Trust (LSE: MTE). Allow me to explain why.

If I’m to seriously grow my wealth, I arguably need to have some exposure to small-cap stocks. Minnows have the potential to grow at a faster clip than market giants, compounding my money at a fast rate. The best bit is that smaller companies aren’t heavily followed, regardless of their quality. That makes for a fertile hunting ground for managers like MTE’s George Cooke.  

The trust’s track record speaks for itself. MTE achieved a 32.8% return in 2021. Unsurprisingly, this thrashed the still-very-respectable 15% of its benchmark. Personally, I think this performance justifies the undeniably steep 1.2% ongoing charge. 

Unfortunately, this performance has reversed in 2022 so far. The share price has fallen 23% year-to-date as I type. That screams ‘opportunity’ to me. 

What’s in the fund?

MTE’s biggest holdings are circuit board producer NCAB, software provider Esker and business applications supplier Fortnox. Interestingly, the trust has almost a third of its assets invested in Swedish companies. German businesses represent 15% of the portfolio with France, Switzerland and Italy taking up roughly 10% each.

Another thing worth noting is just how many (or few) businesses make up the portfolio. Based on its most recent factsheet, MTE comprises just 57 holdings. That’s fairly concentrated for an investment trust that’s focused on the lower end of the market spectrum.

Worth the risk?

So, what might go wrong from here?

Obviously, there’s a possibility that the price of this investment trust may continue falling in 2022. A stuttering post-pandemic economic recovery or a dash to safety due to interest rate rises could shake out more investors. And the crisis on the Russia-Ukraine border won’t exactly attract capital to the region. Even if the markets do recover quickly from this year’s wobble, there’s no guarantee that European stocks will keep up with other parts of the world either. 

More generally, the Montanaro European Smaller Companies Trust may struggle to repeat its stellar returns going forward. Since smaller companies are inherently less liquid (harder to buy and sell), MTE’s share price could be more volatile too. 

Long term focus

To mitigate this risk, I’ve kept some powder dry with the intention of adding to my holding further down the line. Of course, there’s the potential for this to backfire if the MTE’s share price rises from here. However, it’s psychologically much easier for me to build a position in tranches rather than go all-in from the outset.  

Another thing I’ve done is to stay diversified. This includes staying invested in other funds, such as FTSE 100-listed Scottish Mortgage Investment Trust. There’s no overlap in holdings between this and the small-cap fund. 

Last, I’ve also been reminding myself that this is intended to be something I retain for years and possibly decades. Having this time horizon means there’s little point in me getting too worried about market moves of the kind we’re seeing right now.

The Details

The executed stock split saw existing investors receive 10 additional shares for every one already owned. This decision has no direct impact on the overall market capitalisation of the company. But as the total number of shares outstanding is now 10 times higher, each existing share is worth 10 times less. Thus triggering the 90% drop in the MTE share price. It’s worth noting that this plunge may not be visible on some historical price charts, as often these display split-adjusted prices.

Stock splits do not provide any immediate financial advantage for an underlying business. However, the drastic reduction in the MTE share price does allow the stock to become more accessible to investors with smaller amounts of capital.

The argument provided by Montanaro’s management team on recommending the split was that it “may increase the attractiveness of the company’s shares to potential investors and increase the liquidity in the market for the shares”.

What’s next for the share price?

Montanaro European Smaller Companies Trust does exactly what it says on the tin — it’s a trust focused on smaller companies in Europe. The performance of the group ultimately depends on the underlying growth of the businesses it has a stake in.

The improved market liquidity provided by a lower share price may have some short-term benefits. But over the long term, any positive effects will likely be negligible for the company itself.