Latest trust commentary

Market review

Compared to the FTSE 100’s return of 6.9%, the FTSE Mid 250 ex Investment Trusts index returned 2.9% during the period, with the basic materials industry, driven by mining, outperforming. The performance gap between the two has widened to its most extreme point in the last four years, with mid-caps returning 9.5% compared with 55.9% for large caps for the four years to the end of December 2025. The FTSE 100’s greater weighting in banks and aerospace and defence companies has been fundamental to this outperformance (although Q4 itself was weak for the aerospace and defence sector). Banks have benefitted from higher interest rates and minimal bad debts, while aerospace and defence has benefitted from higher defence spending following Russia's invasion of Ukraine in 2022, and the realisation, more generally, that Europe must re-arm itself.

In contrast, more domestically focused UK mid-caps (around half of the revenues in the FTSE 250 ex IT index) have faced ongoing challenges, including modest UK economic growth, relatively* higher interest rates, and increased taxation.

Historically, these businesses have commanded higher valuations than large cap companies and the shares have significantly outperformed over the longer term because of their stronger growth potential. The current valuation discount and higher dividend yield is therefore an anomaly and initial (ytd 2026 neck and neck returns) evidence suggests that market participants are beginning to realise this. This creates a significant opportunity for investors willing to look beyond the most well-known names and identify mispriced opportunities in this under-researched part of the market.

*relative to the Euro zone

Performance & activity

The fund underperformed the benchmark during the fourth quarter of 2025.

The main detractor to performance was our position in multi-utility company Telecom Plus. It came under pressure following interim results, which indicated greater competitive pressures together with a failure to communicate clearly a shift in cost allocation. However, we saw earnings estimates unchanged, meaning that the shares are now trading on a price/earnings ratio of less than ten times, with a lowly geared balance sheet and a well-covered dividend.

Our exposure to defence was another significant detractor through our holdings in QinetiQ and Chemring. The aerospace and defence sector gave back some of its sizeable gains from earlier in 2025, as rumours of a peace deal between Russia and Ukraine gained momentum. We view this sector as providing exposure to advanced technology and innovation, but with less valuation risk than many technology sub-sectors. It is also an area in which the UK continues to punch above its weight. Until relatively recently, few investors shared this view, but the sector has become increasingly favoured over the past 18 months amid heightened geopolitical tensions and a growing recognition that European nations must raise defence spending and reduce reliance on the US. Despite the performance pull back in the fourth quarter, the sector’s long-term attractions also include excellent earnings visibility, supported by long-term contracts and deep relationships with its government customers.

On the positive side, our positions in investment manager Man Group, professional services business SSP and Games Workshop were the most significant contributors, as all showed positive trading momentum.

Investment outlook

While domestic fiscal pressures, and geopolitical uncertainty continue to shape the global environment, markets have shown resilience as investors adapt to evolving trade and policy dynamics. Inflation has moderated but remains above target levels, limiting central banks' scope for rapid policy easing. These factors have contributed to intermittent volatility, yet UK mid- caps have delivered respectable absolute returns in 2025, albeit behind those of the FTSE 100. With further interest rate cuts expected we see scope for progress from here.

Corporate and consumer balance sheets are in good health with UK household savings rates of 11% at 25-year highs, except for the Covid period. A high proportion of mid cap companies is undertaking sizeable share buyback programmes, driven by strong cash generation and low valuations. Several of these are owned by your Company.

Regardless of the policy backdrop, our priority remains building a diversified portfolio of companies that have pricing power, which provides an effective means of growing profits.

We would like to remind investors that the UK mid cap market contains many unique, cash-generative companies with strong growth prospects, some of which are showcased in our Schroder UK Mid 250 podcasts – this is why the Mid 250 index has kept pace with the returns of the S&P 500 and is well ahead of most developed markets over the long term.

___________________________________

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

Fund risk considerations - Schroder UK Mid Cap Fund plc

• Capital erosion: Where fees are charged to capital instead of income, or a fixed distribution amount is paid regardless of the Company’s performance, there is the potential that performance or capital value may be eroded.
• Concentration risk: The Company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the Company, both up or down.
• Counterparty risk: The fund may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the fund may be lost in part or in whole.
• Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in such investments could be lost, which would result in losses to the Company.
• Liquidity risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.
• Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.
• Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.
• Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
• Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.
• Smaller companies risk: Smaller companies generally carry greater liquidity risk than larger companies, meaning they are harder to buy and sell, and they may also fluctuate in value to a greater extent.