Buy into UK mid-cap stocks' recovery with this investment trust

Schroder's investment trust specialising in UK mid-cap stocks has an impressive long-term record and looks cheap

The FTSE 250 index of mid-caps has done very well over the past quarter-century. As Anthony Lynch, manager of the Mercantile Investment Trust, noted in February, “the FTSE 250 Index of mid-cap companies has not only trounced the FTSE 100 since 1995 but has also beaten the S&P 500 Index over the same period”.

In the last five years, however, the 11.6% return of the FTSE 250 has lagged the FTSE 100’s 15.5%. So this could be a rare opportunity to buy mid-caps at bargain prices. The £195m Schroder UK Mid Cap Fund (LSE: SCP) is on a 15% discount to net asset value (NAV). Admittedly, the performance of the £1.9bn Mercantile Trust has been 15% better over the last five years, but Mercantile trades on a discount of 10% and the ten-year numbers favour SCP.

The Heineken index 

Andy Brough has co-managed the trust since it moved to Schroders in 2000. For the first ten years, it also invested in small caps but then focused on the 194 companies in the FTSE 250 that are not investment companies. “I think of it as the Heineken index,” he says, “as it gets refreshed like no other. Lots of changes make it an exciting universe.” Brough relishes being able to invest both in recovery stocks that fall out of the FTSE 100 and growth stocks that are coming up. “Our aim is to find companies that will make it into the FTSE 100 but to leave before the party ends.”

He has no regrets about having to sell shares that get there. “Getting into the FTSE 100 is often as good as it gets. Companies strain to be promoted and then can’t do much.” 

For example, Sports Direct’s share price fell from 880p to 260p while in the blue-chip index. In 2009, Brough filled the portfolio with housebuilders, all but three of which were subsequently promoted. This gets him through the challenge of knowing when to sell a share, “one of the hardest things to do as a fund manager”.

Brough is not an out-and-out growth investor: “It is rare to have companies in the portfolio with no or negligible revenues.” Tech sector investments include Computacenter, the IT services business, and SDL, the largely-automated translation services company. 

But “technology is also intrinsic to the success of other companies in the portfolio, such as Dunelm, Pets at Home, and Man Group, a fund management group that processes 2.5 billion bits of data a day”.

The pick of the pubs

These holdings sit alongside “old economy” ones such as Safestore, the self-storage group, and JD Wetherspoon, the pub company that founder Tim Martin named after the geography master who told him he would amount to nothing. 

Brough subscribed to its recent fundraising because “if it can’t survive, no pub chain can. It has spent all its time since coming to the market buying back the equity it floated, so you know that things are tough when they actually issue it.” 

As far as the macroeconomic backdrop is concerned, he is cautiously optimistic. “There is a line of sight on the exit from pandemic lockdown, but two-metre social distancing doesn’t work economically” (the World Health Organisation recommends one metre). He also worries about “who will pay the bill, the fraying of obedience as people return to work and the paradox of thrift as increased saving results in lower demand”. 

The post-pandemic world will throw up threats as well as opportunities for businesses: “If they need less space and rent has become an optional payment, what does that mean for property values and banks?” Emergence from the 2009 crisis paved the way for five years of exceptional performance by mid-caps in general and SCP in particular. The opportunity now may prove as good. 

Recommended

Russia and Ukraine: what does Putin want?
Global Economy

Russia and Ukraine: what does Putin want?

Russia's president Vladimir Putin has many reasons for his military build-up on the border with Ukraine, but the costs of an invasion would be extreme…
29 Jan 2022
The charts that matter: gold proving no safe haven
Global Economy

The charts that matter: gold proving no safe haven

Tech stocks fell yet further this week, while gold followed suit. Here’s what happened to the charts that matter most to the global economy.
29 Jan 2022
Scottish Mortgage Investment Trust update: share price down as tech stocks crash
Investment trusts

Scottish Mortgage Investment Trust update: share price down as tech stocks crash

Scottish Mortgage Investment Trust has been remarkably successful over the years but is now trading at a discount to its NAV due to falling tech stock…
28 Jan 2022
Cryptocurrency roundup: Putin backs crypto-mining, and spoof McDonald’s coin takes off
Bitcoin & crypto

Cryptocurrency roundup: Putin backs crypto-mining, and spoof McDonald’s coin takes off

Saloni Sardana looks at the cryptocurrency stories that caught our eye this week.
28 Jan 2022

Most Popular

Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022