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My favourite UK stock’s a FTSE 100 fixture with a market-cap of almost £30bn. Yet it never seems to be on many people’s radar. It’s flying high on mine though.
I’m talking about private equity and infrastructure specialist 3i Group (LSE: III). Whenever I checked out the 3i share it was going great guns. So when I shifted some company pensions into a Self-Invested Personal Pension (SIPP) last year, it was one of the first stocks I bought.
3i Group’s now the biggest single direct equity holding in my portfolio, having risen 56% since I added it to my SIPP on 3 August last year. And that’s not a one-off.
Blue-chip outperformer
The investment trust is the fourth best performer on the FTSE 100 over the last year, up 52.85%. Over five years, it’s in third place, up 172.42%, beaten only by Frasers Group (up 280.98%) and Diploma (190.59%).
This is particularly impressive, given that private equity’s going through a tough time, as higher borrowing costs hit fund-raising, dealmaking and exits.
It doesn’t seem to have hurt 3i Group though. Full-year 2023 results showed a total return of £3.84bn, equivalent to 23% of opening shareholders’ funds. That was down from a 36% return of £4.86bn in 2023, but still pretty solid. It’s started 2024 pretty well too.
The group has liquidity of £1.3bn, which includes £336m in cash and £900m in an undrawn revolving credit facility. Net gearing’s a surprisingly modest 4%.
My first concern is that its outperformance has been boosted by one super successful investment, Dutch non-food discounter Action. It’s booming with 2,300 stores across 11 European countries. Last year, it generated a gross investment return of £3.7bn, or 33%. Action now makes up 31.32% of its portfolio.
Power of three
3i Infrastructure plc is the fund’s second biggest holding at 8.53%. However, it’s lagged the rest of the portfolio, hitting the overall return.
The 3i share price has idled lately and I’m not expecting it to suddenly go gangbusters. These are tough times for the mid-cap M&A US and European market it operates in. I’m prepared for a less spectacular return in future, but I still reckon it can continue to outpace the FTSE 100.
There are dividends on offer, as well as growth. 3i’s trailing yield is a lowly 2.01% but that’s largely down to its share price surge. The board’s progressive, hiking the most recent full-year payment by 15% to 61p per share.
My biggest worry is today’s sky-high valuation, with the trust trading at a whopping premium of 37.86% to net asset value. Management has a brilliant track record dating back to 1945, but the risk/reward ratio looks a little skewed. Especially since 3i now makes up almost 10% of my total SIPP.
I won’t buy more at today’s high price but I’m not selling what I’ve got. Instead, I’m going to let it run and run. I still believe in the power of 3i group.
