Invesco Perpetual UK Smaller Companies (IPU ) managers Jonathan Brown and Robin West intend to increase gearing over the coming months to enhance returns as the UK’s economic backdrop improves. 

The pair said that having lowered gearing, or borrowing, from 5.4% to 4.5% of net assets over the six months to the end of July, they will now look to lift it as UK small-cap valuations become attractive, interest rates drop and takeover activity continues.

‘Interest rates are likely to fall further with inflation back towards its target, and this should improve the relative attraction of equities compared to bonds and bank deposits,’ they said.

‘This, combined with an improving economic backdrop, and the ongoing takeover activity in the sector, suggest that we are likely to increase gearing over the coming months.’

They added that despite the Labour government’s ‘protestations’, the UK economy was in ‘decent shape’, with the consumer sector benefiting from 10% growth in discretionary income as wages rise ahead of inflation.

‘Household balance sheets are also relatively strong following a period of elevated savings. This, combined with full employment, should ensure a healthy consumer backdrop as we progress through the year,’ they said.

The £126m trust had a strong 12 months, with net asset value total return of 13.8% beating the 12.1% delivered by the Numis Smaller Companies and AIM benchmark, interim results show. 

The consumer discretionary sector was the largest contributor over the half year, with leisure, media and financial sectors also performing strongly. 

The managers highlighted fund administration services company JTC (JTC) – the largest holding, at 4.5% of assets – which was the top performer thanks to a number of acquisitions by the financial administration business, largely in the US. 

Investment platform AJ Bell (AJB) saw stock market improvements boost its fee income, while Alpha Financial Markets Consulting (AFM) was taken over by private equity group Bridgepoint.  

Brown and West added analytics and data company GlobalData (DATA) to the fund over the first half given its benefits from a ‘high level of recurring revenue, with 85% of sales coming via subscriptions’.

‘The company owns over 290 proprietary data sets including medical and drug data, pricing indices and industry sales data, which it packages and sells to companies in different ways,’ said the duo.

It has an ‘enviable’ growth record, with revenues rising 80% over the past five years, and it is ‘highly profitable’. The £434m sale of a share of its healthcare division provided the firm with cash to invest in the business.

Oxford Instruments (OXIG), the precision instruments provider, also made it into the portfolio, thanks to its ‘attractive margins’, long-term growth record and cash balance sheet.

Over the half year, the share price gained almost 11% but has fallen 11.6% to 415.6p since then, despite the board maintaining the dividend target of 4% of net assets, as well as paying a special dividend to compensate investors for the double-digit discount, which now sits at 18%.

The fund passed its continuation vote at the end of June with 94% of shareholders voting in favour of the continuation of the trust.