The managers of Invesco Perpetual UK Smaller Companies (IPU) have applied the same approach to stock-picking over several market cycles. They aim to buy high-quality businesses, but not try to be too clever in determining whether the market will favour value or growth stocks in the months ahead.
The portfolio is therefore balanced between what the managers define as cyclical, structural growth and ‘self-help’/recovery opportunities. Their valuation discipline means that they like to take profits, regularly trimming into strength and recycling capital into more attractively valued opportunities. In their view, this helps protect capital in down markets when compared to more growthy peers, leading to a track record of generating good returns with lower volatility.
As we discuss in Performance, IPU lagged more growth-orientated peers over 2020, having moved too early into cyclical stocks. However, IPU is amongst the top performers of the sector in NAV terms since the announcement of an effective COVID-19 vaccine in November 2020. this has been achieved with lower volatility than the peer group average.
The team have a strong focus on investing in ‘quality’ companies, with pricing power and strong balance sheets that will take market share. In the managers’ view, UK stocks are more attractive than those in other markets, and they point to the level of takeover activity as evidence of the value on offer.
Currently IPU trades on a Discount of 13.8% – wider than peers – and offers a significant dividend yield of 3.2% on a historical basis. The board’s policy is to pay quarterly dividends that, in aggregate, amount to 4% of the financial-year-end share price.
The statistics over five years (see Performance) show that Jonathan and Robin continue to achieve their objective of delivering strong returns with below average volatility. That said, the past 18 months have not been an easy period, but IPU is clawing back much of its H1 2020 underperformance relative to peers.
In our view, IPU’s strong track record compared to peers is impressive, given it has been achieved without using leverage. We understand that with the board supportive of employing gearing, the managers hope to put borrowed capital to work if there is a significant market pullback.
IPU’s dividend, and the way it is funded, is in our view a key attraction for shareholders. The board has now reinstated its previous dividend policy of paying 4% per annum from a mixture of capital and income, and as such we see no reason why IPU’s shares should not trade on a premium relative to peers once again. At 3.2% on a historical basis, the dividend yield is attractive, with potential upside owing to the dividend target of 4% of the financial-year-end share price.
IPU’s performance did experience a blip in H1 2020. As we discuss under Performance, the trust is now firmly back in the middle of the peer group. Having reinstated the same dividend policy as previously, there doesn’t appear to be a logical reason for IPU’s discount to stay materially wider than that of peers, which could present an opportunity.
|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 outperform
|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 that of the peer group
||Discount could widen out further