My favorite UK stock is up 56% for the year – can it continue to smash the FTSE?

My favorite UK stock a FTSE 100 a structure with a market cap of around £30bn. Yet it doesn't show up on most people's radar. It flies above mine though.

I am talking about private business and infrastructure experts 3i Group (LSE: III). Whenever I checked the 3i share it was going big guns. So when I switched some company pensions to a Self-Invested Personal Pension (SIPP) last year, it was one of the first stocks I bought.

3i Group is now the biggest direct fund holding in my portfolio, having risen 56% since I added it to my SIPP on 3 August last year. And that's not a single release.

A blue-chip outperformer

The investment trust was the fourth best performer in the FTSE 100 last year, up 52.85%. In five years, it is in the third place, increased by 172.42%, it was only beaten Group of Frasers (up to 280.98%) and A diploma (190.59%).

This is particularly impressive, considering that private equity is facing a difficult time, as high borrowing costs affect fundraising, trading and exits.

It doesn't seem to have hurt the 3i Group though. Results for the full year 2023 showed a total return of £3.84bn, equivalent to 23% of opening shareholder funds. That's down 36% to £4.86bn in returns by 2023, but still strong. It started 2024 very well again.

The group has £1.3bn in cash, which includes £336m in cash and £900m in undrawn debt facilities. Net gearing is an impressive 4%.

My first concern is that its efficiency has been boosted by one successful investment, Dutch non-food discounter Action. It is booming with 2,300 stores in 11 European countries. Last year, it generated a capital return of £3.7bn, or 33%. The stock now makes up 31.32% of its portfolio.

Three powers

3i Infrastructure plc is the second largest fund at 8.53%. However, it lagged the rest of the portfolio, hitting all profits.

3i's share price has dropped recently and I don't expect it to go gangbusters. These are tough times for M&A US in the middle of the European market in which it operates. I'm prepared for negative returns in the future, but I still think it can continue to outperform the FTSE 100.

There are dividends to offer, as well as growth. 3i's trailing yield is a low of 2.01% but that has largely offset the rise in its share price. The board is improving, raising the most recent full-year payout by 15% to 61p per share.

My biggest concern is today's sky-high valuation, with reliable trading at a high of 37.86% of total assets. Management has a good track record going back to 1945, but the risk/reward ratio looks a little skewed. Especially since 3i now makes up about 10% of my total SIPP.

I won't buy anything else at the high price today but I'm not selling what I have. Instead, I'll let it run and run. I still believe in the power of 3i group.