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Fund Profile

Schroder UK Mid Cap Fund 28 November 2019

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Schroder UK Mid Cap. 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

Schroder UK Mid Cap (SCP) is a FTSE 250 ex-IT focused trust. Managed by Andrew Brough and Jean Roche, the trust focuses tightly on mid caps, exiting companies when they are promoted to the large-cap FTSE 100 index.

Andrew and Jean construct a portfolio from what they deem the best opportunities in a universe of c.190 companies (the FTSE 250, minus other investment trusts). The focus of the managers is very much on bottom-up stock analysis, seeking to identify two positive categories and one negative category of stocks: 1) long-term growth opportunities, 2) cyclical opportunities and 3) stocks to avoid.

Long-term growth opportunities will comprise the majority of the portfolio, usually around 60%. These are typically high-quality companies with strong competitive positions in industries subject to structural growth trends. Cyclical opportunities are likely to be more vulnerable to fluctuations in the economic cycle; the managers are seeking companies in sectors where they believe improved capital discipline and allocation across the sector can drive increased pricing power and improved profitability for companies within it, or companies that have internal catalysts to improve these issues. The managers are relatively style-agnostic, with a focus on the operational performance and prospects of the underlying companies, and how this will translate to pricing power.

Recent returns have remained strong, outperforming the sector and benchmark index, but the trust remains at a discount of c.-14.3% (as of 19/11/19), with ongoing political uncertainty seemingly a factor in depressing sentiment towards this area. The managers note that the UK as a whole remains a significant underweight in global fund manager surveys, but that they believe there are a significant number of attractive opportunities available at present.

The current dividend yield of c.2.9% is well covered, with revenue reserves in excess of the previous financial year’s dividend.

Kepler View

SCP continues to be managed in line with a strategy that has historically generated outperformance over the longer term. Andrew and Jean believe that negative global sentiment towards the UK market and economy as a whole is not aligned with the actual economic data, which could make this an interesting entry point. Should UK growth remain reasonable, and political risks abate, the greater domestic revenue generation within the portfolio could lead to outperformance, whilst providing a tailwind to the UK market as a whole.

The discount on SCP has proven a reasonable barometer of sentiment towards the UK as a whole, and mid caps in particular. The current discount level does not suggest we are at capitulation-style levels of sentiment, but certainly suggests there is a significant amount of negativity already discounted in the share price. Historically, drawdowns have tended to be slightly greater than the wider market, though this is to be expected given the mid-cap focus.

Given the trust’s mid-cap focus and manager’s strong track record of alpha generation through stock picking, for investors bullish on the UK we believe SCP is likely to offer superior upside potential should UK equity markets start to recover their poise.

bull bear
Stock selection has tended to drive performance Political risks remain in the UK, particularly given the forthcoming general election
The discount is at a level which has historically proved attractive Drawdowns tend exceed those of the wider All-Share index
The UK is under-owned by international investors; a rebound could benefit absolute and relative performance Gearing could exacerbate losses
Continue to Portfolio
2024 Kepler Income & Growth Rated Fund

This trust has been awarded a rating by Kepler Trust Intelligence for income & growth... Find out more

Fund History

11 Apr 2024 Fund Analysis
Mid-caps have bounced back on the potential for rate cuts…
15 Mar 2024 Schroder UK Mid Cap Fund plc: UK equities – what’s the catalyst?
Mid caps particularly well poised for a UK renaissance...
17 Jan 2024 Top of the Pops
We reveal the winners of our investment trust ratings for 2024…
14 Dec 2023 Results analysis: Schroder UK Mid Cap
Stock selection has driven SCP’s strong performance, but low valuations could offer much more…
30 Aug 2023 UK OK, HUN?
Sentiment towards the UK is at rock bottom, which means only one thing…
06 Apr 2023 Fallen Kingdom?
Since the UK was described as a ‘Jurassic Park’ stock market, it has outperformed. Is this a new age for the stock market..?
22 Mar 2023 Fund Analysis
SCP targets unique exposures from the dynamic mid-cap index, which is arguably still cheap…
11 Jan 2023 Solving the Rubik’s Cube
We reveal the winners of our investment trust ratings for 2023…
06 Jan 2023 Investment trusts: a rare opportunity in UK small and mid-sized companies
Opportunity knocks for UK small and mid-sized companies – find out why...
12 Oct 2022 The Buck stops where?
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05 Oct 2022 European equities: Oui ou non?
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27 Jul 2022 Has the comeback begun?
Our analysts debate whether the market has fully priced in the current inflation and looming recession…
20 Jul 2022 Fund Analysis
An appealing double-digit discount for those willing to ride out near term uncertainty...
05 Jan 2022 Kepler’s top-rated trusts for 2022
We unveil the winners of our ratings for 2022 in the Growth, Income & Growth and Alternative Income categories…
28 Apr 2021 The next value opportunity?
Two of our analysts debate whether Europe's improving vaccination programme will be the next opportunity for investors in their pursuit of returns...
20 Jan 2021 Kepler's top-rated investment trusts for 2021
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28 Nov 2019 Fund Analysis
UK mid-cap specialist with an extensive track record, trading on a wide discount...
26 Jul 2017 Fund Analysis
25 Jul 2017 Carpe discount
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