Fund Profile

Invesco Perpetual UK Smaller Companies 21 March 2019

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.

Overview
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Overview

Jonathan Brown and Robin West are fundamental stock pickers, with a strong valuation discipline. The team were taking profits in more highly rated stocks in the year to the end of Q3 2018, and from Q4 were adding exposure to companies previously viewed as too expensive, post significant share price falls.

The managers aim to achieve above average returns (relative to peers) through the cycle with lower volatility. The strong performance so far in 2019 YTD with NAV returns +11.7% isn’t necessarily expected, given the historic pattern of returns where the managers typically lag very strong markets. We hazard that the strong relative performance over the past six months has been largely a result of the team’s focus on valuation and their trading activity.

Jonathan and Robin aim to identify companies which have a sustainable competitive advantage, a compelling proposition in a growing market, as well as good management and balance sheet strength. They look for businesses that have the potential to double in size over the next five years, and in typical Invesco Perpetual style, hold for the long term (valuations aside) – their typical annual turnover is 25% (the latest figure from Morningstar is 27.9%).

IPU’s portfolio typically comprises around 80-90 holdings, with no position allowed to get much bigger than 3% of NAV – an approach that the managers say means they can sleep at night. However, the current uncertain political environment has translated into a desire to invest in only those companies they have a high degree of confidence in. As a result, the number of holdings in the portfolio has dropped to only c 71 holdings currently.

The team usually take profits in stocks which they believe are over-valued, and which trade on very high multiples. Their approach has stood them in good stead since the start of Q4 2018. The portfolio has been performing especially strongly recently, and over both the short and medium term, the trust is currently in the top decile relative to peers over most periods.

Over the past five years, the trust has delivered a NAV total return of 62.3%, relative to the benchmark’s return of 30.3%, and has beaten the index in all of the past five calendar years. The managers have an alpha score of 4.6% pa over the same time frame. The degree of outperformance of the index over five years is significant, particularly so when you consider that the manager has achieved this without the use of leverage.

The dividend, which equates to a yield of 4.3%, is achieved by distributing all the available income arising from the portfolio, boosted by a small proportion from capital profits. This compares very favourably with other small company funds and trusts, but also those in the equity income sector. The fact that a proportion of the dividend comes from capital means that the managers have not had to tilt their investment approach to achieve this level of income for shareholders.

Relative to the index (and some peers) the trust continues to have more of a value angle, prompted by a view that Brexit has led to a global aversion to domestic UK exposure which means stocks are attractively valued. UK sales of the portfolio are currently estimated at c. 55%, relative to the benchmark of 65-70%. Reflecting their caution, the team has around 5% cash in the portfolio currently.

Kepler View

That the trust's longer term outperformance is largely a result of stock-picking skill is reflected in the 5-year alpha score of 4.3% pa. The recent performance through Q4 and YTD shows the benefit of the manager’s valuation-led, generally cautious approach. As a result, IPU continues to deliver top quartile returns, but with lower than average volatility.

The discount is currently fairly negligible, which does present a potential risk for shareholders should risk appetites recede. However, over time, the trust has developed a solid following particularly with retail investors, and since the 2015 enhanced dividend policy was implemented, has commanded a premium rating relative to peers based on the strong and consistent performance from the managers but also the high dividend yield, currently 4.3% on a historic basis – the highest in the UK Small Cap investment trust and open-ended sectors.

IPU offers exposure to a top-rated management team, with a significant yield premium relative to peers. Importantly, this yield is achieved without compromising the long-standing investment process, which has delivered such excellent long-term results.

BULL
BEAR
Consistent investment process delivers strong results through cycle, with lower volatility
Dividend paid from capital may not be tax efficient for some investors
Highly stable and experienced team – currently top quartile in investment trust peer group
Trades at a premium rating to peers, and narrow discount in absolute terms
Attractive dividend yield
Often, lags peers when the market is “hot”, although has kept up well YTD
Continue to Portfolio

Fund History

25 Mar 2022 Slides and Audio: Invesco Perpetual UK Smaller Companies
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23 Mar 2022 Fifteen ideas for your ISA
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03 Nov 2021 Fund Analysis
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28 Jul 2021 How are the mighty fallen
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26 May 2021 Stand and deliver
Is a high OCF daylight robbery or should investors keep calm and carry on? Our analysts debate the perennial question…
17 Mar 2021 Fund Analysis
IPU is back up the performance tables once again, thanks to the managers’ valuation led approach...
06 Jan 2021 This time next year Rodney...
We review the performance of the team’s ‘top picks’ for 2020 – including some proper plonkers – and place our bets for the year ahead…
25 Nov 2020 Britannia Redux
UK equities have been despised for almost five years and could offer extreme rebound potential…
19 Nov 2020 Fund Analysis
On a material discount once again, IPU looks attractive for long term investors...
11 Nov 2020 Now that's what I call a discount!
Presentations and audio from our conference focussed on discount opportunities in the investment trust sector…
11 Nov 2020 Slides and Audio: Invesco Perpetual UK Smaller Companies
View the presentation and listen to the audio from our 'Discounts in Focus' event on 05 November...
22 Oct 2020 Spotlight on discounts
As our event focussed on discounts approaches, we update our portfolio of discount opportunities and review discounts across the wider IT universe…
17 Sep 2020 Blood in the streets
The UK Smaller Companies Sector faces plenty of challenges, but bombed out valuations among trusts in the sector look interesting...
23 Jun 2020 Thrown out with the bath water?
IPU’s de-rating has been savage...
17 Jun 2020 Jonathan Brown & Robin West
This stockpicking duo have managed the Invesco UK Smaller Companies trust as a team since 2014...
06 May 2020 The fight in the dog
We look at the characteristics which have separated the winners from the losers among small-cap trusts in the current crisis, with some surprising results...
01 May 2020 Fund Analysis
IPU has performed defensively during the selloff, and now trades on a small discount once again...
11 Mar 2020 Seeking big opportunities in UK smaller companies
20 Nov 2019 Off to the races: Kepler's fund shortlists post strong performance
We check in on our growth, income and annuity income shortlists launched earlier this year, which have performed strongly in 2019 to date...
15 Oct 2019 Fund Analysis
Fundamental stock pickers, aiming to achieve top quartile performance with below average volatility…
06 Sep 2019 Realising potential on the financial front line
Invesco UK Equities managers Jonathan Brown and Robin West discuss three stocks that have fulfilled their investment thesis over the last few years...
01 Aug 2019 Rethinking UK equity income
Despite being a popular allocation for investors, the UK Equity Income sector is currently plagued by the problem of concentration. Our analysis suggests smaller companies could be a strong alternative source of diversified income…
27 Mar 2019 NEVeR MiND tHE B*LL*CKS
We cut through the histrionics and discover, with surprising results, what life has really been like for British investors since David Cameron put it to 'the people'....
21 Mar 2019 Fund Analysis
A UK smaller companies fund which aims to achieve above average returns through the cycle with lower volatility...
06 Feb 2019 Income for the long haul
With 'ISA season' looming we identify investment trusts which offer long-term, dependable income streams for yield-hungry investors...
30 Jan 2019 The Growth Portfolio
Our ten investment trust picks for long-term capital growth...
13 Dec 2018 Efficiency is everything
With fee structures under increasing scrutiny, we analyse which trusts limit their costs without sacrificing standards...
23 Oct 2018 Fund Analysis
A consistent and cautious approach has contributed to Invesco Perpetual UK Smaller Companies outperforming over the longer term...
12 Sep 2018 High flyers
Our research shows small-cap managers adding consistently more alpha, and regulatory change means this could be an attractive time to invest in the sector...
19 Jun 2018 Fund Analysis
A UK smaller companies fund which aims to achieve above average returns through the cycle with lower volatility...
19 Jun 2018 Pretty little things
Many smaller companies managers have been shifting into micro caps in 2018, should investors be following suit?
22 Mar 2018 The search for discounted yield
We scour the investment trust universe for trusts offering chunky yields on a discount...
25 Oct 2017 Patience is a virtue…
We analyse the outperformance of UK small-caps and why it is so important to take a long-term view...
24 Oct 2017 Fund Analysis
A strong track record and a useful source of income
26 Jul 2017 Apt student
Invesco CIO Nick Mustoe tell us he started out with just a university grant as seed capital for his first portfolio...
04 May 2017 Fund Analysis
26 Apr 2017 Size matters
Our analysis proves that investment trusts really are the best way to access smaller companies, and exposes liquidity concerns for their open ended counterparts...
View all

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