Invesco Perpetual UK Smaller Companies 31 May 2024
Disclaimer
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) owns a portfolio of high-quality, small-cap companies that are trading at attractive valuations and have the potential to grow over time. Managers, Jonathan Brown and Robin West, focus on risk-adjusted returns with the goal of creating a portfolio that offers investors ‘sleep at night’ exposure to the asset class. This has been supported by a barbell approach, which balances the portfolio between defensive businesses with robust earning profiles and more cyclically exposed businesses (see Portfolio).
The trust also pays a Dividend of c. 4%. This comes from a combination of underlying revenue generated by the portfolio and a contribution of capital. As a result of low valuations in the market, the contribution to the dividend that is coming from the underlying income has increased significantly.
The managers began to add more to their cyclically exposed companies in 2023 which has led to some strong performance in the recent rally. Despite this, the managers believe market valuations remain attractive, and the recovery from these valuations has historically led to strong returns over the following couple of years (see Performance).
The managers have reflected their positivity in the trust’s Gearing position. This has historically been used gearing sparingly, but the managers have increased the level to c. 6.5%.
Despite the short-term pick-up in NAV performance, the Discount on the shares has widened to c. 15%. This is almost one standard deviation wider than the trust’s own five-year average.
Managers, Jonathan and Robin, have taken a number of steps in recent months that we think have increased the attractiveness of IPU. Firstly, they have tilted the Portfolio towards more cyclically exposed businesses which could offer more upside should the positive momentum we have seen in the economy and markets in the near term continue throughout 2024. The portfolio still has a barbell approach though, which we believe offers comfort to investors that the trust remains a balanced, risk-adjusted offering in the sector. The managers have also consolidated the tail of the portfolio, to ensure only their highest conviction ideas remain. We believe a more concentrated portfolio could be beneficial in a rising market.
Furthermore, they have increased the Gearing position of the trust to over 6%, having previously used it sparingly. We believe this marks a real show of confidence from the managers and could contribute positively to performance. The managers highlight that when the small-cap market has traded at the valuations it is currently, it has been followed by periods of strong recoveries. As such, we believe this could prove an attractive entry point for long-term investors.
Compounding this is the trust’s wide Discount. Whilst the trust has traded at a discount for several years, this has widened in the past few weeks despite the improved NAV performance. As such, we believe it could reflect a lag in the positive sentiment returning to the investment trust sector, as it seems to have done in wider markets, and could contribute to overall returns for investors.
Bull
- Risk-adjusted approach offers 'sleep at night' exposure to potentially volatile area
- Discount remains wide not reflecting a near-term pick-up in performance
- Trust also offers a good dividend, not often seen in smaller company investing
Bear
- Barbell approach means trust is unlikely to be a top performer in bull markets
- Trust has increased gearing which can amplify losses as well as upside
- Small asset base has contributed to above-average OCF
Fund History
