The Daily Telegraph Questor: Schroder UK Mid Cap


Important Information: This article was written by the Daily Telegraph, all views and opinions are those of the publication as date 28 May 2020 unless otherwise stated and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. Data is at 27 May 2020. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

We know that the stock market has recovered strongly from the depths of the coronavirus-induced sell-off in mid-March but it's easily forgotten that not all parts of the market have bounced back to the same extent.

The FTSE100 stands about 17% below its pre-crisis level but the FTSE250 index of medium-sized firms is more like 21% lower.

Now, that may not strike you as an obvious bargain at a time of huge economic uncertainty but what if you could get exposure to this middle tier of the British economy a further 20% or so more cheaply?

This is what, broadly speaking, you could do if you bought one investment trust that focuses on this part of the market.

The trust we have in mind is Schroder UK Mid Cap.

To be clear, it's not in any way a "tracker" fund - it is actively managed by Andy Brough, who has been with the fund since 2003, and Jean Roche, who joined him in 2016. But the fund does, in the words of Iain Scouller, an investment trust analyst at Stifel, the stockbroker, "give you broad exposure to UK plc”.

"The trust has about 60 holdings, or only about one in four of the stocks in the index, but it is in every corner of the domestic economy," he said.

What is striking is the discount. At 18.8%, it is at the upper end of  its range over the past year, 2% - 19%, and not far off twice its 11% average over the same period.  

"This does seem reasonably wide," Mr Scouller said. "It is driven by sentiment. Because FTSE 250 companies tend to be more focused on the domestic economy, they were very hard hit in March.”

10605-Tel_Schroders_28052020-Graph.jpg

Source: The Daily Telegraph, May 2020

If the market can continue its slow recovery from the depths seen then, as the lockdown is gradually eased, and if renewed appetite for medium-sized British stocks attracts buyers to this trust, investors could benefit twice over. And that's before any possible extra gains from good stock selection on the part of the fund's managers.

One reason for the trust's wide discount could be its inclusion of "value" stocks, whose long-standing unpopularity has only deepened.

The fund is not an out-and-out value portfolio but owns a mixture of value and growth stocks.

This too could put wind in its sails as we finally begin to move on from lockdown. "Some value stocks have been under pressure because they often have weak balance sheets, which can accentuate problems during a recession," said Mr Scouller. "And they are often income stocks, so those that have had to suspend their dividend have also been punished by investors.”

But concerns over the risks posed by weak balance sheets should ease once the economy picks up, he said, and the resumption of dividends should also be welcomed by the market.

The trust's inclusion of value or income stocks has allowed it to pay a generous dividend: last year's payment of 18.5p equates to a 4.4% yield at the current share price.

We don't of course know how much less income it will receive in dividends from its holdings this year, but the trust does have reserves equivalent to 150% of last year's payment, which its board could use to meet or at least reduce any shortfall.

Discrete yearly performance (%)

 

Q1/2015 -Q1/2016

Q1/2016 - Q1/2017

Q1/2017 - Q1/2018

Q1/2018 - Q1/2019

Q1/2019 - Q1/2020

Share price

0.4

10.8

16.6

5.8

-27.1

Net Asset Value

5.4

12.3

9.2

0.7

-25.3

FTSE 250 ex Investment Trust TR

2.2

13.6

5.6

-0.9

-21.2

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.

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