Investment Trusts

Mail on Sunday Fund Focus: Schroder UK Mid Cap investment trust


Jean Roche

Jean Roche

Fund Manager, Pan-European Small and Mid Cap Team

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Andy Brough

Andy Brough

Head of Pan-European Small and Mid Cap Team

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The mission of Schroder UK Mid Cap Fund is to search out the country's most exciting growth companies, businesses that one day may be so successful they form part of the FTSE 100 Index.

It's a modus operandi that does not always spring instant investment results, but co-manager Jean Roche is convinced investors will reap rich rewards in the long term.

Although the trust has underperformed the FTSE All-Share Index over the past year, it has significantly outperformed it over the past decade (297 per cent versus 174 per cent). Roche sees no reason why such superior long-term returns cannot be continued.

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Roche, who runs the investment trust with long-standing manager Andy Brough, believes their fishing grounds – companies that comprise the FTSE 250 Index – provide plenty of choice, a number of fast-growing companies and some attractive dividends along the way.

Next month, the trust will pay an interim dividend of 3.8p on shares trading at £5.30. This represents an increase of 15 per cent on the year before – with anyone who holds shares on the ex-dividend date on Thursday being eligible for the payment.

The shares currently provide a dividend yield of a tad over three per cent.

How this money can help

The trust has 63 holdings – all 'liquid' stocks according to Roche. No stock can be bought or sold without the consent of both managers and once a holding joins the FTSE 100 Index, it is automatically discarded. 

'Our view is that most companies enjoy their strongest growth ahead of becoming part of the main stock market index,' says Roche. 'It's proven a good policy.'

The latest fund stake to be unwound as a result of it joining the FTSE 100 is sports retailer JD Sports which became part of the index last month. Recent new holdings include war games retailer Games Workshop, a company she likes because of its strong market positions in both the UK and Europe. 

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Roche refers to the FTSE 250 as the 'Heineken Index' because it is being constantly 'refreshed' as a result of companies being taken over and businesses being promoted to the FTSE 100 or relegated from it. 

Although the trust's holdings generate a healthy 48 per cent of their revenues outside the UK, the Brexit factor has nibbled away at share price performance. 

The shares currently stand at a 15 per cent discount to the value of the trust's assets.

A resolution to the Brexit issue would help remove this discount – providing a boost to shareholder returns – although Roche seems relaxed about the matter, indicating that any future market uncertainty would allow Brough and herself to hunt down some attractive buying opportunities. 

She is also buoyed by the country's economic resilience and the fillip that the spending plans of Boris Johnson and Jeremy Hunt would provide to economic growth if either became PM.

The trust's charges are being kept under a tight leash by the board. Late last year, the annual management charge fell from 0.7 per cent to 0.65 per cent with a lower rate of 0.6 per cent applying to the value of assets above £250million.

She believes the stock market success of both home emergency repairs company HomeServe and food retailer SSP (owner of brands including Upper Crust and Millie's Cookies) could soon catapult them into the FTSE 100 Index, realising profits for the trust.

Investment trust JP Morgan Mid Cap is run along similar lines to that of the Schroder fund. Over the past five years, its investment record is better, but not over the past 12 months.

Discrete Yearly Performance (%)

Q2/2018-Q2/2019

Q2/2017-Q2/2018

Q2/2016-Q2/2017

Q2/2015-Q2/2016

Q2/2014-Q2/2015

Share Price

-3.2

16.0

29.6

-16.4

7.3

Net Asset Value

-1.8

11.7

27.8

-8.8

11.4

FTSE 250 ex Investment Trust TR

-5.9

11.2

21.5

-5.7

15.0

What are the risks?

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.

The Company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment companies that invest in larger companies.

The Company 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 Company may be higher but there is the potential that performance or capital value may be eroded.

The Company 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.