Invesco Perpetual UK Smaller Companies 18 January 2023
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.
Invesco Perpetual UK Smaller Companies (IPU) looks to set itself apart in the competitive peer group through the manager’s aim of building a portfolio of quality companies that will deliver top quartile returns at lower-than-average volatility. IPU also pays a healthy Dividend of c 4% from a combination of the underlying income and capital returns from the portfolio.
To achieve this, managers Jonathan Brown and Robin West use the wide range of resources at their disposal through Invesco to filter the universe of c 900 companies, down to a portfolio of companies who can exhibit pricing power, have strong management teams, and low debt levels. This includes AIM stocks which have been widely used by the managers. The trust has recently moved its benchmark to take better account of this (see Performance).
In recent years, the managers have adopted a barbell approach due to the uncertainty around the macroeconomic environment. This has given the Portfolio a blend of different stock exposures, including growth orientated companies and undervalued opportunities. They have also increased the cyclical exposure in the trust as stock markets have fallen, where they believe the market is pricing in a worse recession than what they believe is likely. However, IPU has fallen to a wide Discount, both in absolute terms and relative to the sector and its own history. The managers believe that if the sentiment changes, it could result in a significant rally in the asset class.
UK smaller companies have had a tough period for a number of years with 2022 being no exception. However, over the long-term the returns from the asset class are very strong and it is worth highlighting that after recessions, come recoveries, and these are the markets that smaller companies tend to perform best.
We believe the manager’s approach of looking for quality companies (see Portfolio) will help the trust benefit from companies that are able to survive and capture market share in a downturn, meaning they are well positioned to benefit from a recovery. On top of this, the ‘sweetener’ of the Dividend means investors will continue to get a return as this story plays out. Furthermore, the trust’s net cash position (see Gearing) and below average volatility goal make it a lower risk option in an asset class that we believe deserves a long-term allocation in investors’ portfolios.
It may seem a tricky market currently considering the high inflation and rising interest rate environment, but managers Jonathan and Robin believe that markets are cheap. They do not believe the environment is as bad as the headlines would suggest (see Performance). If they are right, it means a turn in sentiment could lead to a significant rally. Considering the trust is on a Discount that is wide versus its own history and relative to the market, IPU is arguably an interesting potential opportunity for long term investors.
Bull
- Barbell positioning offering a balance of exposures
- Trust pays an attractive dividend, considerably above the sector average
- Trading on a wider discount versus its own history and to the peer group
Bear
- Steadier returns mean it is unlikely to be a top performer in the short-term
- Relative outperformance has historically come in rising markets
- Payment of dividend from capital will mean trust will remain smaller than it would otherwise
Fund History
