This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
In January Kepler Trust Intelligence released the ‘Kepler's top-rated investment trusts for 2021’ article, in which senior analyst Thomas McMahon applied historical quantitative analysis to identify the top-performing closed-ended funds in the Growth, Income & Growth and Alternative Income categories. The ratings were designed to highlight those managers which have achieved consistent outperformance, with attractive risk characteristics. As the selection system is entirely quantitative, it allows trusts to be compared without any personal biases and views – and without regard to commercial relationships – and for us to look at the universe in a purely objective way.
In this blog, which will be distributed monthly, we will aim highlight things which we think stand out among the top rated trusts, whether it an attractive entry point, a significant change, or a piece of significant news affecting the strategy.
The first trust under our microscope in 2021 is Schroder UK Mid Cap (SCP). SCP aims to provide a total return in excess of the FTSE 250 ex Investment Trusts Index and an attractive level of yield, which can contribute a degree of stability to the fund’s total return.
It was announced in late December 2020 that the veteran UK stock picker Andy Brough is passing lead responsibility for the investment trust to Jean Roche, his co-manager. After this announcement the trust’s discount widened significantly. Before the news, the trust was trading at a discount of c. 2% but has since widened to the current level of c. 12% (as at 01/02/2021). This compares to a sector weighted average of c. 4%.
Despite this apparently poor sentiment toward the change in management, we are not convinced it will have a huge impact on the trust. Although Andy was is an old hand in the investment trust space, Jean has worked with him on SCP for more than four years now. Alongside this, very little about the process has changed and the trust’s high-conviction investment approach will continue to focus on resilient companies that are capable of delivering high-risk adjusted returns with rising cash flows and earnings.
Since the hierarchical shift, the trust has continued to perform strongly, and over the past month, ending 01 February 2021, delivered NAV total returns of 0.7%. This compares to a sector average of -1.3% and -0.2% from the benchmark. In fact, over the past six months the trust has now delivered some of the strongest returns of the AIC All Companies sector, returning 29.2% on a NAV total return basis. Relative to the FTSE 250, ex ITs, this represents a 5.9% outperformance according to Morningstar.
Over 2020, the trust did see some significant hits to the underlying dividends, with a reduction of more than 55% in investment income during the pandemic. After dipping into reserves, this caused the board to cut the final dividend in half to 9.5p and leave total dividends for FY20 at 13.3p, down 28.1% on the previous financial year. As a result, SCP just yields 2.3%. Despite this, we believe the trust stands in decent stead for 2021. The outlook for dividend income from UK companies next year is expected to improve from last year's depressed levels according to the board of SCP. Consequently, the current discount of c. 12% could be an interesting entry point into a trust which has seen a possibly misplaced shift in sentiment in spite of strong momentum in NAV growth terms. Meanwhile the UK looks likely to exit its vaccination programme earlier than many peers, which could give the local economy and stock market a boost.
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