TIDMSCP
Schroder UK Mid Cap Fund PLC
14 December 2023
Schroder UK Mid Cap (SCP)
14/12/2023
Results analysis from Kepler Trust Intelligence
Schroder UK Mid Cap (SCP) has released its financial results for
the year ending 30/09/2023. Over the year, the trust saw its NAV
increase by 17.6% on a total return basis, which represents
outperformance of the benchmark, the FTSE 250 ex-Investment Trusts
Index, of 13.6%. This was also better than the average NAV return
on the AIC UK All Companies sector of 15.4%.
Performance was driven by strong stock selection, with the
largest positive contributors coming from those stocks where the
managers have a large active position.
The trust has continued to deliver strong outperformance over
the long term, with annualised returns since 2003, when Schroders
took over management of the trust, of 12.2% versus 10.3% for the
benchmark.
Despite the strong outperformance delivered by the manager, the
discount widened slightly to 12% at the end of the period from
11.4% at the start of the period.
The board has declared a final dividend of 15p per share, which
marks an increase of 7.1% from the previous year. When combined
with the increased interim dividend of 5.5p declared in June, the
trust has increased its full year dividend by 7.9% versus 2022. The
trust offers a yield of 3.7%, based on the most recent closing
share price.
Net gearing was reduced to 6.8% as at year end, versus 10.8% the
previous year.
Chairman Robert Talbut struck an optimistic tone stating: "We
are now seeing inflation falling rapidly, bringing the prospect of
lower interest rates at some stage in 2024 which should improve the
outlook for economic growth." He added that the approach of looking
for, "high risk-adjusted returns with rising cash flows and
earnings and with conservatively financed balance sheets [...]
should help to continue to deliver sustainable returns to our
shareholders."
Kepler View
Jean Roche and Andy Brough, the managers of Schroder UK Mid Cap
(SCP), aim to build a focused portfolio of around 50 of the best
opportunities from the mid cap sector, as measured by the FTSE 250
Index. They target this index for its dynamism and constantly
evolving nature, as well as the wide range of opportunities it
offers.
Due to the concentrated nature and the focus on unique
businesses, stock selection is expected to typically be the primary
driver of performance. This has been the case in the most recent
financial report in which the trust returned 17.6%, outperforming
the benchmark by 4%. Holdings in consumer focussed companies Games
Workshop, Dunelm and Cranswick were three of the top four
contributors to performance, despite the consumer being perceived
as under pressure, which we believe demonstrates good stock
selection abilities. We note the market has treated firms who have
given profit warnings particularly harshly over the period, though
the managers have avoided the worst effects of this, notably by not
holding Spirent and Drax.
The managers have added to a diverse range of companies in the
year, based on a variety of stock specific factors. These have been
funded through a number of disposals, including companies that have
been sold following their promotion to the FTSE 100, and after
share price recoveries which have led to the managers seeing better
valued ideas elsewhere. They believe the mid cap space continues to
offer plenty of opportunities at attractive valuations, given that
mid caps are trading at a discount to large caps, whilst providing
a higher dividend yield, both of which are rare phenomena. Despite
this, the managers have maintained their risk-aware approach, which
has led to a portfolio that is significantly less indebted than the
index.
The trust has delivered another year of dividend growth, despite
it not being an explicit goal of the managers. An increased final
dividend has led to a total for the year of 20.5p, up from 19p the
previous financial year. The managers point to the lower debt
profile for their portfolio as a supporting factor in this being
sustainable. We believe the dividend yield - c. 3.7% at the current
share price - adds another positive element to the total return of
the trust.
Despite another positive year, the discount on the trust has
remained stubbornly wide. We believe this is a result of negative
sentiment towards domestically-focussed UK businesses which doesn't
reflect the easing of economic headwinds, nor the very cheap
valuations of the sector - and by extension, SCP. As such, this
could be seen as an attractive entry point for long-term investors,
with Jean and Andy's stock selection prowess a stand out element of
the investment case.
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(END) Dow Jones Newswires
December 14, 2023 08:55 ET (13:55 GMT)
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