Invesco Perpetual UK Smaller Companies 28 December 2023
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Invesco Perpetual UK Smaller Companies. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Invesco Perpetual UK Smaller Companies (IPU) is managed by long-standing co-managers Jonathan Brown and Robin West, who aim to build a portfolio of quality small-cap businesses with good growth potential that are trading at attractive valuations. The managers have a focus on risk-adjusted returns, aiming to deliver outperformance in a variety of market conditions by capturing the long-term growth the asset class offers, whilst limiting the volatility that can come with it (see Portfolio).
The trust has an enhanced Dividend policy designed to improve the total return offering. This allows investors to receive an income on top of the capital growth potential that the asset class typically exhibits.
Long-term Performance has been good, with the managers having delivered strong outperformance versus the benchmark over a number of years. More recent absolute returns have been challenged, but the managers believe this may offer an opportunity, with valuations being very attractive. They highlight that the economic headwinds the asset class has faced are easing, and continued M&A activity could be a catalyst for markets to recover. To capitalise on this improving momentum, the managers have deployed Gearing for the first time in a number of years.
Negative sentiment led to the trust’s shares trading at a Discount to NAV in the past few years. This level has narrowed in 2023, though only to a level back in line with the five-year average. The shares have traded at a premium as recently as early 2020 as sentiment towards the asset class became more positive.
We have long noted IPU as a more risk-conscious way of accessing the attractive growth opportunity of UK smaller companies (see Portfolio). Whilst the approach has not changed, the fact the managers have now deployed Gearing for the first time in many years should, in our opinion, be seen as a conviction signal that they believe the asset class offers a compelling opportunity. Over the long term, smaller companies tend to outperform larger peers and therefore the timing of this application of gearing could prove astute. Robin and Jonathan point to low valuations, easing of economic headwinds and gathering momentum as reasons to believe we could be on the cusp of a strong recovery for smaller companies.
Beyond the near-term potential, we believe IPU is a well-rounded offering in the smaller companies space. The managers’ barbell approach enables the trust to navigate a range of market conditions and allows stock selection to drive Performance. This has led to long-term outperformance of the benchmark, and whilst no guarantee of future returns, we believe it should provide reassurance to investors. Furthermore, the enhanced Dividend policy supports total returns which we believe provides an element of comfort to the investment case.
- Asset class has arguably an improving outlook and is gathering momentum
- Historically offered a lower volatility way of accessing the asset class
- Attractive dividend policy to complement total returns
- Barbell approach means trust may lag in short-term, stylistic rallies
- Deployment of gearing can amplify losses as well as improve upside potential
- Smaller companies most at risk of further weakening in the economy