The Invesco Perpetual UK Smaller Companies Trust (IPU) management team has been in place for many years, with Robin West joining long-term manager Jonathan Brown in 2014. Over the cycle they aim to achieve top quartile performance with below average volatility compared to their peers. The team aim to achieve this through a diversified portfolio and fundamental stock picking, and by applying a consistent investment philosophy.
The UK’s smaller companies equity market was hit harder than most during Q1 2020. As we discuss in the Performance section, IPU declined slightly less than most peers but has not rebounded as strongly. This trend is in line with what shareholders might expect, based on previous cycles.
With reference to the lockdown and expected economic downturn, the managers have closely reviewed their portfolio. As we discuss in the Portfolio section, they view the majority of holdings as ‘low’ and ‘medium’ risk to COVID-19 related issues. The 13% that the managers classify as ‘high’ risk are companies within the retailing and leisure sectors. Overall Jonathan and Robin believe they are well placed to support any investee companies that require additional financing, having gone into the crisis with cash of around 6-7%. Their preference for well financed businesses means they believe that 76% of the companies in their portfolio are unlikely to need equity financing to get them through the crisis.
IPU recently announced that the 2020 dividend will be held at last year’s level. However, in view of current circumstances, the board will pay a dividend for the current financial year of no less than 2% of the 31 January 2021 share price.
We believe that IPU’s attractions are many. The managers represent a dependable team with an enviable track record of achieving peer group-beating returns through the cycle, but with below average volatility. They apply their investment process consistently, and their valuation-driven approach means that shareholders can be reassured that the team won’t lose their heads, even when others are.
The trust has now achieved six consecutive calendar years of outperforming the benchmark, in both up and down markets. We attribute this success to the cautious nature of the managers’ stock picking, their preference for high quality companies, and their continual recycling of strong performers into better value opportunities.
The board’s recent dividend commitment means that, while investors might be disappointed that the dividend level will not be maintained into next year, they can place a high degree of reliance on the dividend for the current financial year. Perhaps more importantly, the board retains its commitment to pay a dividend yield of higher than the average of the peer group after the crisis abates.
IPU was issuing shares from treasury as recently as January, which in our view is testament to the attractive package that the trust presents. The trust’s consistent management, sector leading returns with below average volatility, and its yield premium relative to the investment trust peer group all justify the premium rating to peers that IPU currently enjoys.
|Consistent investment process delivers strong results through cycle, with lower volatility||Dividend level won't be maintained next year|
|Highly stable and experienced team||Trades at a premium rating to peers, and narrow discount in absolute terms|
|Commitment to deliver a yield premium to the peer group||Portfolio tends to trade at a P/E premium to benchmark|