Behind the trust: Schroder UK Mid Cap Fund plc

Want to invest in the companies of the future? Look no further than mid-caps. Medium-sized companies are a sweet spot for innovation and disruption. Unlike many smaller companies, they have proven business models and unlike many large companies they may have ahead of them a steep growth trajectory.

When investing in this sweet spot of disruption, the UK is a prime location. While not commonly seen as a hotbed for innovation, the UK is home to many forward-thinking businesses that are extending a competitive advantage in areas like cyber security, the energy transition, fintech, gaming and online retail.

Indeed, the FTSE 250 Index, the next 250 largest companies outside the FTSE 100, has beaten most developed market indices over the long term, including the tech-heavy S&P 500 in the US.

The growth potential of UK mid-caps has not been lost on shareholders in the Schroder UK Mid Cap Fund. It is the best performing trust in the AIC (Association of Investment Companies) UK All Companies sector since it launched in 2003¹. But how has the trust delivered such outstanding performance and what makes it a worthy addition to an investor’s portfolio today?

What does the trust do?

The trust invests in mid-cap equities, predominantly companies from the FTSE 250 Index, with the aim of outperforming the FTSE 250 ex Investment Trusts Index.

It is run by a formidable pair in mid-cap investing in the form of Jean Roche and Andy Brough, who boast 23 and 35 years’ investment experience, respectively. Roche co-managed the trust between September 2016 and February 2021, when her strong performance saw her promoted to lead manager.

She is ably supported by Brough, who has spent his entire career as a UK equities fund manager at Schroders and is currently head of Schroders’ London-based pan-European small and mid-cap team.

How does it do it?

The fund managers have a large and diverse universe of potential investments, many of which attract little to no analyst coverage. That means they can use their experience and expertise to pick companies with the great potential of being tomorrow’s UK market leaders before the wider market has realised that potential and it is become priced into the shares.

The trust’s relatively modest size allows it to be both focused and nimble when investing further down the market cap scale. The managers make meaningful investments, running a high conviction portfolio of companies that they believe can provide the best returns.

So how do they mitigate that risk? They do so by looking for companies that are resilient. They favour quality management teams with clear strategic visions, robust balance sheets and strong ESG credentials.

They strike a balance between established companies that are adaptable enough to respond to disruption and newer, disruptive companies that are challenging the status quo. And, while being focused, the portfolio is exposed to a wide spectrum of investment sectors and themes and to both UK and overseas earnings.

Why invest?

There are many compelling reasons to invest in the Schroder UK Mid Cap Fund. Here are some of them:

1. Dynamic universe

The FTSE 250 is an incubator for growth and the managers can see their strategy really working when a company’s success triggers its promotion to the FTSE 100 Index. The trust’s strict sell discipline when a company reaches the large-cap index sets it apart from other strategies. This exclusive focus on medium-sized companies allows the managers to refresh the portfolio and back the next rising stars. In fact, the mid-cap sector is home to many innovative and fast-growing businesses that are riding the wave of long-term structural growth trends. Themes in the portfolio range from the adoption of 5G and growing need for cybersecurity to the humanisation of pets and monetisation of strong intellectual property.

2. Wealth of opportunities

The FTSE 250 covers a hugely diverse set of businesses. These are not small businesses. Many are household names, doing business both here in the UK and overseas. In fact, around half the revenue that FTSE 250 companies generate comes from outside the UK. The mid-cap universe is constantly being disrupted by new challengers via market events such as IPOs, mergers and acquisitions, promotions from the small-cap index and demotions from the large-cap index. Portfolio companies can be disruptors, which challenge the status quo within their marketplace.

3. Best ideas

A portfolio of circa 40 to 50 names makes Schroder UK Mid Cap significantly different to its benchmark and lets the managers focus on where they believe the investment case is the strongest. Research shows that concentrated portfolios comprised of a manager’s best ideas are more likely to outperform. Adding more stocks simply dilutes the impact of those best ideas. In addition, the more stocks from a manager’s investable universe that are added to a portfolio, the more it starts to resemble the benchmark, giving less margin for outperformance.

4. Focus on resilience

The managers favour companies that are resilient and adaptable in the face of change. Many of their holdings emerged from the Covid-19 pandemic in a stronger position. The trust’s rapid rebound from the market selloff in February and March 2020 – far faster than the benchmark index – is testament to the strength of portfolio companies. Companies with niche products exposed to structurally growing markets are more able to pass on rising costs to consumers of their products.

5. Exposure to undervalued opportunities

UK equities have been out of favour since the EU referendum in June 2016 and remain under-owned by international investors. However, there are signs that it has recently been piquing the interest of trade and private equity buyers hunting for bargains. There are also bargains to be had in the form of investment trust discounts, which appear to be sentiment rather than performance driven.

6. Access to companies

Extensive engagement with companies is a key part of the process. As one of the UK’s largest investors, Schroders has substantial access to companies’ management teams. It meets with company management teams in advance of investing and thereafter at least once a year but often on numerous occasions. It also regularly meets with those companies not in the portfolio to monitor the investment case for positive changes.

7. Strength of management

Roche holds the Chartered Financial Analyst designation, as well as an MSc in financial and industrial mathematics. She was previously named a Wall Street Journal analyst of the year based on her stock-picking skills. Brough, an economics graduate and former chartered accountant, is one of the best-known names in mid-cap investing and the longest tenured manager of a UK mid-cap trust, having run the Schroder UK Mid Cap Fund since the outset in April 2013.

8. Research capabilities

External research on mid-cap companies is limited in scope and often in quality, giving the managers ample opportunity to outperform. Detailed analysis of company report and accounts, company meetings and visits and the use of industry experts are all a vital part of their research process. The application of their experience to these inputs, coupled with an extensive global in-house analytical resource, gives them the potential to continue to deliver attractive returns to shareholders.

Click here to find out more about the Schroder UK Mid Cap Fund plc >

[1] - Ranking in Association of Investment Companies (AIC) UK All Companies sector as at 31 December 2022, sourced from Morningstar, covering period from close 30 April 2003 to 31 December 2021 (NAV ex income total return); only three funds currently in the sector have a track record for this period.

Reference index: FTSE 250 ex Inv Trusts TR

Fund risk disclosures

The trust Invests in smaller companies that may be less liquid than larger companies and price swings may therefore be greater than investment trusts that invest in larger companies.

The trust will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.

As a result of the fees and finance costs being charged partially to capital, the distributable income of the trust may be higher but there is the potential that performance or capital value may be eroded.

The trust may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.

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Important information

This is a marketing communication.

This article does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of the Schroder UK Mid Cap Fund plc.

Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares.

An investment in the Company entails risks, which are fully described in the prospectus.

Subscriptions for shares of the Company can only be made on the basis of its latest Key Investor Information Document and prospectus, together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Unit Trusts Limited (SUTL) UK.

For the UK, these documents can be obtained in English, free of charge, from the Facilities Agent Schroder Investment Management Ltd, 1 London Wall Place, London EC2Y 5AU or at www.schroders.co.uk.

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. Exchange rate changes may cause the value of any overseas investments to rise or fall.

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This information is not an offer, solicitation or recommendation to buy or sell any financial instrument or to adopt any investment strategy. Nothing in this material should be construed as advice or a recommendation to buy or sell. Information herein is believed to be reliable but we do not warrant its completeness or accuracy.

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 Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registration No 4191730 England. Authorised and regulated by the Financial Conduct Authority.