Investment Trusts

Outlook 2019: Schroder UK Mid Cap Fund plc

Andy Brough, Co-Fund Manager, Schroder UK Mid Cap Fund plc is cautiously optimistic on the outlook for UK Mid Cap equities as the UK economy demonstrates resilience in the face of Brexit related uncertainty.

17 Jan 2019

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With the plethora of forecasts since the EU referendum, what has actually happened to the UK economy since June 2016? Well, the economy has continued to expand at a steady pace (and ahead of expectations) against the backdrop of a very low unemployment rate and rising wages. The country’s fiscal position has also recovered as tax revenues have picked up, further underlining the resilience of the UK economy. We are, therefore, cautiously optimistic about the future.

The chancellor significantly loosened the purse strings in the Budget, in what the Office for Budget Responsibility has described as the “largest discretionary fiscal giveaway” since the economic advisory body was created in 2010. This comes at a time when nominal wages have continued to rise (up 3.2% in the three months to September, the fastest rate since December 2008), while a moderation in inflation has seen the return of real wage growth.

Despite their depressed levels of confidence in the general economic outlook, UK consumers remain positive about their personal financial situation. We certainly see evidence that consumers remain willing to spend from our portfolio holdings. The key challenge remains identifying the beneficiaries of the increased spending, at a time that structural changes impacting the UK high street and other consumer-facing sectors now seem to be accelerating.

In this regard, it’s our view that the odds could be skewed in favour of investors in UK small and mid-cap (smid) companies. This is an area of the market packed full of companies taking advantage of new technologies and the internet to drive growth, disrupt and take share from sector incumbents. In a fast-evolving world, smids are generally better able than large caps to capitalise on the opportunities as they tend to be more dynamic, and have a small base from which to achieve growth.

We have identified a number of specialist retailers that are bucking the decline in the UK high street. They encompass a whole range of sectors, from cutting-edge “athleisure” fashion to homewares retailing. Many of them are in the foothills of “multi-channel” strategies, as they discover the right mix of in-store and online experience to maximise growth. Others take in niches such as pet supplies or casual dining, where management teams are seizing the initiative, making changes and turning performance around. And there are plenty of companies benefiting directly from the travails of sector peers.

At the same time it should not be forgotten that the revenues of the FTSE 250 are evenly split between overseas and domestic sources, so smid investors stand to benefit both from exciting overseas growth opportunities, and the highly depressed sentiment towards UK domestics. Given the growing divergence between the best and worst-performing shares the environment is changing in favour of the active stockpicker or active asset manager who picks correctly, creating scope to outperform the market.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

 

Discrete yearly performance (%)

 

Q3/2017 - Q3/2018

Q3/2016 - Q3/2017

Q3/2015 - Q3/2016

Q3/2014 - Q3/2015

Q3/2013 - Q3/2014

Share price

5.0

23.6

-4.0

5.0

8.8

Net Asset Value

2.9

21.1

6.2

8.1

8.9

FTSE 250 ex Investment Trust TR

4.2

14.2

8.6

12.7

5.3

 

Past performance is not a guide to future performance and may not be repeated.

With effect from 26/01/2011 Schroder UK Mid & Small Cap Fund plc changed its name to Schroder UK Mid Cap Fund plc and changed its investment objective. In April 2011 the FTSE 250 x Investment Trusts replaced the FTSE All Share ex ITs ex FTSE 100 TR. The full track record of the previous index has been kept and chain linked to the new one.

Some performance differences between the fund and the benchmark may arise because the fund performance is calculated at a different valuation point from the benchmark.

Source: Schroders, with net income reinvested, net of the ongoing charges and portfolio costs and, where applicable, performance fees, in GBP as at 30 September 2018.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

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What are the risks?

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

The Company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment companies that invest in larger companies.

The Company will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.

As a result of the fees and finance costs being charged partially to capital, the distributable income of the Company may be higher but there is the potential that performance or capital value may be eroded.

The Company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.