Invesco Perpetual UK Smaller Companies Trust (IPU) is a clearly differentiated trust within the UK Smaller Companies sector. The managers’ approach is as relevant in today’s environment as ever and stands the trust apart from its peers. The team aim to deliver top quartile returns over the cycle with below-average volatility through their ‘valuation aware’ approach to growth investing. This sees them continually re-evaluate their investment theses to ensure that stock valuations on winning stocks are not getting ahead of the business progress.
As discussed under Performance, IPU lagged more growth-orientated peers over 2020, having been too early into cyclical stocks that had been hit very badly by the market sell-off. Trusts with higher technology and growth exposure outperformed. However, many of the companies the managers bought in March and April 2020 have rebounded very strongly since November 2020. As a result, IPU is amongst the top performers of the sector in NAV terms since the announcement of an effective vaccine in November. So strong has the recovery been in some names since then that the team have been selling some holdings and recycling capital back into ’COVID-winners’ which have seen their valuations fall.
The team have a strong focus on investing in ‘quality’ companies and, in their view, it is these companies with solid franchises and strong balance sheets that will be in a good position to take market share when the economic recovery comes.
2020 saw IPU experience a marked de-rating – both in absolute terms but also relative to peers. As it currently stands, IPU trades on a discount of 13.1%, compared to the weighted average sector discount of 4.6%.
The managers’ discipline in following their investment process is to be credited, in what has seen a full market cycle develop over the period of only 12 months. Jonathan and Robin aim to invest in growth companies at a reasonable price, but also, when prices become unreasonable, to sell. The result is a dynamic portfolio that, during 2020, took a barbell approach, with around 50% of the portfolio in solid, defensive, growth companies and 50% invested in companies exposed to a cyclical recovery. In our view this balance puts the trust at a distinct advantage relative to peers in the current environment, with the return profile perhaps less vulnerable to swings in style factor performance. It is showing in the performance numbers too, and we think shows how well the strategy is suited to the managers’ objective of achieving strong returns with lower volatility than peers.
IPU has experienced a savage derating; having traded on a premium to NAV in early 2020, it now trades on a material discount to both NAV and to the peer group average. At the same time, the fundamental attractions of the trust have not changed and one might argue that the recent performance shines a light even more strongly on its positive attributes for long-term investors. Combined with an announced dividend, supported by capital, representing a yield of 2.9%, we believe investors looking for a balanced way to take advantage of a UK recovery would be well placed to consider IPU.
|Consistent investment process has delivered strong results through the market cycle with lower volatility
||Given more balanced positioning, may underperform more style-concentrated peers if growth or value sharply outperforms
|Highly stable and experienced team
||Payment of dividend from capital means trust will remain smaller than it would otherwise
|Attractive dividend, offering a significant yield premium to the peer group
||Discount could widen out further if pandemic recovery falters