Schroder UK Mid Cap 20 July 2022

Schroder UK Mid Cap (SCP) is managed by Jean Roche and Andy Brough. Their aim is to generate total returns in excess of the FTSE250 ex Investment Trusts Index, through investing predominantly in UK mid-cap stocks. With an extensive analyst support team, they take a bottom-up stock selection approach to running a high conviction strategy – seeking companies that can demonstrate sustainable growth prospects with management teams that have a strong vision for success. They also favour companies that challenge the status quo and are adaptable to capitalise on change.

SCP offers access to different opportunities than those amongst the better known FTSE 100 Index, with larger exposures to the industrial and consumer discretionary sectors and domestic revenue sources. The trust’s Performance over the long-term is excellent and it has beaten the benchmark and the peer group average (AIC UK All Companies) over a five-year period. However, the last year has been challenging due to the number of geopolitical and macro events affecting energy prices and investor sentiment in the mid to small market cap segment.

Following the Brexit referendum, SCP’s Gearing was reduced on cautiousness, but has steadily been raised since, last standing at 11.5% (31/05/2022). There is no target for the dividend as the managers target a total return for the portfolio. However, except for 2020 when the impact of the pandemic hit underlying dividend payouts, the trust has a consistent track record of dividend increases and the historic yield is 3%. SCP has an ongoing charges figure (OCF) of 0.9%. ESG adherence plays a strong part in the selection process as the team believe that this can act as an additional layer of risk control.

Jean Roche and Andy Brough have successfully managed SCP with a consistent strategy that has delivered outperformance over the medium and long-term. Despite this, SCP trades at a significant discount to its NAV. We take the view that this is a reflection of investor sentiment towards the mid-cap segment of the market rather than SCP itself. The more growth orientated mid-caps have historically suffered greater drawdowns than the large caps and are perceived as being riskier. The managers also suggest that international investors are under-allocated to mid-caps partly down to a knowledge gap.

Recent market turbulence has opened up SCP’s discount, but the managers believe that this is not representative of the operational performance of underlying portfolio companies which have reported resilient results in recent quarters. However, they express caution as they believe that economic conditions are likely to deteriorate over the short term.

We believe that investors who are prepared to ride out short term volatility should focus on the cyclical upturn and secular growth potential that the trust offers over the medium to long-term. The trust offers a reasonably good dividend yield and a different set of sector exposures than an investment benchmarked against the larger cap FTSE 100 Index. For a trust and managers with a good track record of alpha generation, the double-digit discount could be an attractive entry point.