Underperforming Invesco Perpetual UK Smaller Companies (IPU ) says the prognosis for the UK economy is ‘gloomy’ but manager Jonathan Brown has used ‘anomalously cheap’ markets to pick up two new stocks.

The £132m trust, which as of September has been co-managed by Robin West, saw its underlying portfolio value decline 6.9% over the six months to the end of July, which lagged the 4.2% fall in the Numis Smaller Companies plus AIM index. The share price fared better over the period, increasing 5.4% which narrowed the discount from 12.8% to 11.6%.

UK equities have remained decidedly out of favour and the further down the size spectrum, the bigger the losses.

Trust chair Bridget Guerin said the past six months for smaller companies has been ‘difficult’, as businesses have battled sticking inflation, rising interest rates, fears around the cost of living, and the potential for a recession, all weighing on sentiment.

Brown was just as downbeat about the potential for the UK economy for the rest of the year, stating that growth is ‘lacklustre and we are just beginning to fell the lagged effects of the steep increase in the Bank of England base rate, so the prognosis for the coming year appears gloomy’.

The downcast assessment of the UK economy has, however, created ‘very apparent’ value in the smaller companies market.

Brown said the sector is now ‘anomalously cheap’ and this should ‘attract increased interest from the investment community’, although currently corporate and private equity buyers are the ones taking advantage of ‘knock-down’ prices to snap up London-listed businesses.

‘While the economic backdrop is underwhelming, we continue to see opportunities to buy undervalued shares in companies with excellent long-term growth potential,’ he said.

Two new names been added to the portfolio this year including Tatton Asset Management (TAM), which runs model investment portfolio that it sells to independent financial advisers (IFAs).

Brown said advisers outsourcing investment decisions to specialist companies has ‘increased significantly over the last decade due to an increasing burden of regulation’.

Tatton provides portfolios of both active and passive funds at different risk levels with one of the lowest fee structures in the industry. 

Medical diagnostics business Niox (NIOX), which has technology that can more accurately diagnose and monitor asthma, was also added to the fund.

The group is a world leader in fractional exhaled nitric oxide testing, which measures exhaled nitric oxide as a diagnostic marker for asthma.

‘The product is approved by the National Institute for Health and Care Excellence (Nice) in the UK and is reimbursable in all its major markets,’ said Brown.

‘We believe the business can substantially grow its installed base of devices and this should drive a high level of recurring test kit revenue.’