With UK small and mid caps taking quite a pummelling over the 12 months to 30 September, it is of little surprise that the £192m Schroder UK Mid Cap Fund posted a net asset value (NAV) return of -30% during the period.
The fund’s benchmark, the FTSE 250 ex Investment Trusts Index, performed marginally better, but still languished at -27% across the 12 months.
Joint portfolio managers Jean Roche and Andy Broug noted that there was no respite in the sector this year, as companies have seen “1970s-style” pressure on supply chains and inflation rates in their cost bases. They added that the “risk off” approach that investors adopted as a consequence led to an aggressive sell off in the UK small- and mid-cap space.
The fund closed out the year weighing in at £187.4m, a drop of £88m from September 2021, which erased the £78m it attracted in its previous financial year. In all, the fund’s value fell from £278m on 30 September 2021 to £187m a year later.
NAV per share fell by 31.5% to 542p, but the pace of its decline was outstripped by that of the share price, fuelling a widening of the discount from 7.8% to 11.4%. While NAV has recovered to 639p as of 6 December, the discount has widened further to 14.2%.
The Schroder UK Mid Cap Fund’s share price now sits at 550p, down 25% year to date.
Bad news priced in
In more positive news, the fund managed to distribute an interim dividend of 5p per share, representing a 32% increase the 2021 figure. The report added that the total dividend of 19p was fully covered, and that it constituted a 28% increase on last year.
Roche and Broug said that the UK’s mature, slower growing large-cap companies had performed well over the period, and that this had underpinned the broader UK equity market. However, they added: “This resilience masked very poor performance from small- and mid-cap equities, the extent of whose underperformance against large caps over the period was rare in history.”
Despite this, chairman Robert Talbut saw a silver lining: “Current valuations would suggest that the market has already priced in a lot of the prevailing bad news with small- and mid-cap stocks having underperformed large caps meaningfully during the period. Valuations remain extremely attractive relative to history and [the portfolio managers feel] confident that many of the companies in the portfolio are well placed to thrive in this challenging environment.”
In terms of performance, Telecom Plus and investment manager Man Group were the two best holdings, with the former posting an impressive return of 73.5% across the period.
Speciality chemicals business Synthomer was the lead detractor over the year, returning -50%, with holdings in Future, online betting group 888, and IG Group all underperforming.
There was considerable portfolio activity across the year, in which holdings in Watches of Switzerland, Just Group, and power control solutions provider XP Power were added. The managers also initiated a stake in Weir group, which recently entered the FTSE 100.
Accommodation provider Grainger, commercial real estate business CLS Holdings, and investment manager Petershill Partners were all sold off.