Schroder UK Mid Cap 11 April 2024

Schroder UK Mid Cap (SCP) is managed by Jean Roche and Andy Brough, who look to own a portfolio of medium-sized companies from the FTSE 250 Index, which offer unique exposures to growing markets. They believe their focus on the mid-cap area of the market offers access to companies able to capitalise on the long-term growth that comes with firms specialising in niche markets, whilst also limiting the higher volatility during periods of market stress.

Performance over the very long term has been excellent, with the trust almost tripling the returns of its benchmark since inception, as well as having outperformed in almost every calendar year of the past decade. More recently, the trust has faced headwinds as the mid-cap space has been acutely affected by the higher interest rate environment. Performance in the past 12 months remains in line with the benchmark though.

The Discount on the shares has remained wide for much of the past 18 months, reflecting negative sentiment towards investment trusts and the UK more generally, although the managers point to easing headwinds as reasons for this to narrow going forward.

The trust generates an attractive Dividend. The most recent annual dividend grew c. 8% on the previous financial year to hit a level that is over ten times the trust’s first dividend. As such, the trust currently has a historic yield of 3.7%. This has contributed to SCP being awarded the Kepler Income & Growth Rating for 2024.

SCP offers investors access to the unique, long-term growth opportunities of the dynamic UK mid-cap space, which has become even more exclusive following corporate activity in the sector. The managers have repeatedly demonstrated their ability to outperform their FTSE 250 (ex ITs) benchmark too, with the trust delivering significant cumulative outperformance since inception and in the majority of calendar years.

These capital returns have been complemented by an impressive Dividend track record, the payout having compounded at 13% per annum since inception in 2003, or more than a tenfold increase in absolute terms. The dividends, whilst having grown impressively, are still covered by revenue and also supported by reserves. We believe this adds further attraction to the investment case for SCP and it should appeal to both growth and income investors as part of a diversified portfolio.

The past 12 months to 04/03/2024 has seen a rare challenging period for the managers in relative terms as a result of the impact of interest rates on their area of the market. However, this belies the strong bounce in absolute performance in late 2023, which carried some positive momentum into 2024. We argue this could be the early signs of a turnaround, indicating investors may believe rates have peaked. If so, we believe the mid-cap space is arguably well placed to lead a recovery (see Performance).

The wide Discount the trust trades at could therefore be seen as an attractive opportunity. Not only could this add to investors’ returns should it narrow as mid-caps recover, but SCP could be the beneficiary of some corporate activity. JMF, a former mid-cap peer, has recently merged into a small-cap vehicle, and we believe SCP could benefit from this, as investors who wish to maintain their mid-cap exposure seek alternatives. This increased demand could further contribute to the narrowing of SCP’s discount.