Invesco Perpetual UK Smaller Companies 19 November 2020

Invesco Perpetual UK Smaller Companies Trust’s (IPU) managers have a simple aim: to achieve top quartile performance over a cycle with below-average volatility compared to their peers. Historically, they have achieved this and, whilst the current market conditions have seen the trust struggle relative to peers, this does not mean that over the medium to long term their pattern of top-quartile returns could not return.

Jonathan Brown and Robin West have worked together since 2014, and as a management team have applied the same investment philosophy consistently over this time. Looking to buy and hold companies which can double their profits over five years, they are unashamedly growth investors. However, they are perhaps more “valuation aware” than many competitors, tending to trim especially strong performers and recycle capital into more attractively valued opportunities.

Within the portfolio, the managers believe that any COVID recovery, if it comes, will be rapid, and so have been seeking out high-quality ‘self-help’ companies who would be beneficiaries. These companies represent just under half of the portfolio and constitute one end of the barbell approach that the team have adopted. At the other end of the barbell are the defensive growth companies which have long been a part of the portfolio.

IPU’s yield premium to peers and the market remains: the board have amended their dividend policy which will see a dividend of at least 15p this year (a yield of 3.7%), but also seek to increase dividends annually.

In our view, IPU’s discount is once again a significant attraction for investors. As we illustrate under Discount, IPU has long traded at a significant premium to peers. However, this year the trust has experienced a savage derating.

We believe, however, that the fundamental factors behind the historic premium rating have not changed. The trust continues to offer a relatively secure dividend stream (albeit lower than the previous trajectory) which offers a significant premium to peers. Certainly, the short-term performance since the market nadir has not matched some ‘growthier’ peers. However, investors mustn’t forget that this is likely a characteristic of the investment process which, in our view, has enabled the managers to deliver on their objective of top quartile performance but with below-average volatility over the long term.

We believe that IPU’s fundamental attractions are undiminished. 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.

IPU was issuing shares from treasury as recently as January, which in our view is testament to the attractive package that the trust presents. Yet now investors can buy this same package – in no way damaged by COVID-19 – on a 17% discount, which we view as an opportunity.