Latest trust commentary

Market Summary

After performing very well in the wake of a decisive general election result in early July and in anticipation of the first rate cut by the Bank of England in four years, UK small and mid-sized companies struggled to make further progress as the quarter progressed. At the same time there was a rotation away from cyclical sectors, including domestically focussed consumer sectors (uncertainty around the new economic policies to be announced at October’s Budget) and overseas focussed industrials amid global macro-economic uncertainty. The fund underperformed the FTSE 250 (ex IT) index.

Quarterly Overview

Bulk annuities insurer Just Group performed well after management revealed the company would “substantially exceed” its previous goal set in 2021 of doubling profits over five years, by achieving this and more in 2024.

Telecoms group Zegona Communications was also a strong performer as the owner of Vodafone’s former Spanish assets made good progress on a number of fronts. Among other things, it negotiated two potential fibre broadband joint ventures with competitors Telefonica and MasOrange (which could help to free up a possible c.€2 billion of cash), benefited from an investment grade credit rating and agreed a positive new fibre wholesale agreement with Telefonica.

Not owning Wizz Air was positive after the low-cost airline warned on profits. Equally, we benefited from no exposure to engineering business Wood Group where the shares reacted negatively to the announcement that it was no longer a bid target for Dar Al-Handasah after the Middle Eastern engineering consultancy withdrew its offer to buy the company.

Travel retail specialist WH Smith was a strong performer as a year-end trading update revealed travel essentials spend remained resilient. The update also confirmed progress with the US expansion, where initiatives are starting to deliver improved trading.

Specialty pharmaceuticals business Indivior detracted as it became apparent a competitor is making more ground than expected in the opioid use disorder treatment market where re-enrolments into Medicare/Medicaid have proven to be an obstacle. However, the market remains vast and, unfortunately for those needing the drugs, growing. Indivior’s share price is underpinned by rolling buybacks.

IT services business Computacenter also disappointed as it pushed profit from certain US contracts into the second half and revealed that UK competition continued to be fierce. We take heart from the company’s very strong balance sheet and good visibility over H2. The company is a structural growth story, not to mention an excellent allocator of capital so we have maintained the bulk of our holding.

While direct marketing business 4imprint reported strong H1 profits the shares gave back some of their previous gains which had been driven by serial revenue upgrades. That said, sentiment was not helped as the results implied a slightly tougher market backdrop in terms of top line growth for the remainder of the year. More broadly, the company is clearly taking market share, and we remain confident in its prospects, although alert to a change of finance director.

Not owning St. James’s Place detracted, although our financial sector exposure overall was a strong contributor. Having been relegated from the FTSE 100 in the previous quarter the wealth manager enjoyed something of a share price recovery. Our preferred long-term exposure to financials, however, includes companies such as Just Group, retail derivatives broker IG and other specialists including emerging market fund manager Ashmore (see below). Additionally, we decided in part not to own St. James’s due the change of finance director.

We initiated a new holding in biotechnology company PureTech Health which has $400 million in net cash relative to a market cap of c.$470 million. The U.S. Food and Drug Administration recently approved the company’s schizophrenia medication which is a huge step forward for treatment in this area and the first new drug in more than 50 years. Not only does this trigger a milestone payment for PureTech but more importantly shows the quality the company’s drug development. We also initiated a new position in Ashmore which has £505 million cash and £257 million in seed capital versus a market cap at our entry price of £1.2 billion. Electrical retailer Currys was another new holding where we see recovery in its Scandinavian markets and a stronger UK customer as key catalysts. The company also benefits from a far stronger balance sheet and a hardware refresh tailwind four years after the pandemic and as consumers’ tech appetite is being whetted by new AI-enabled equipment.

Investment Outlook

UK house prices are rising again and close to record highs and the underlying economy appears to be functioning compared to a much more mixed global macro-economic outlook. We’re seeing a hiatus in UK markets ahead of the Budget as the metaphorical finish line comes into the view as to when we’d hope to get more clarity around the new administration’s policies. In the meantime, we note that the FTSE 250 continues to trade on marginally higher prospective dividend yield to the FTSE 100 for a far superior earnings growth outlook.

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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

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, which may adversely impact the performance of the company.

Distribution risk: As a result of fees being charged to capital, the distributable income of the company may be higher but there is the potential that performance or capital value may be eroded.

Concentration risk: The fund 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 fund, both up or down.

Currency risk: The fund may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.

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 that investment could be lost, which would result in losses to the fund.

Liquidity risk: In difficult market conditions, the fund may not be able to sell a security for full value or at all. This could affect performance and could cause the fund to defer or suspend redemptions of its shares, meaning investors may not be able to have immediate access to their holdings.

Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the fund.

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.

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.

Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.