Lowland (LWI), the £372m UK equity income trust running a higher-than-normal allocation to companies outside the FTSE 100, returned 7.1% in the six months to 31 March but lagged the FTSE All-Share as blue-chip stocks once again led the way.

The benchmark index rose 8.9% with shareholders in the Janus Henderson managed trust receiving 6.8% from shares that traded around a 10% discount to net asset value (NAV).

Nevertheless, the investment trust remains ahead of the All-Share over one and three years with 29% and 46.8% total shareholder returns versus the benchmark’s 21.5% and 45.6%. However, over five and ten years it trails the index with 65% and 94.8% compared to the 69.3% and 129.8% of the All-Share, according to figures from the company.

Fund managers James Henderson and Laura Foll generally aim to hold half the trust in FTSE 100 stocks and half in smaller and “mid-cap” companies outside the top flight. However, the undervaluation of smaller companies as UK investors have shifted assets globally in recent years has encouraged them to lift non-FTSE 100 stocks to nearly two thirds of the portfolio, according to data from the Association of Investment Companies.

Chair Helena Vinnicombe said: “As tends to be the case in times of significant geopolitical upheaval, investors were more cautious about smaller companies”. That largely accounted for the modest underperformance but, as in previous periods, the weakness in smaller companies was partly mitigated by takeover approaches for engineer Renold and fund manager Schroders. In addition, there has been a recommended bid from Blackstone for aerospace components supplier Senior.

In the short time since 31 March up to 11 May, Lowland’s NAV had increased by 6.3% and the share price by 7.4%, outperforming the 2.1% rise in the FTSE All-Share, which the chair said was testament to the resilience of the diverse portfolio of 118 stocks.

During the half year Lowland did much better than the Deutsche Numis Smaller Companies Plus AIM index which, excluding investment companies, fell 5.1%. Seven of its top 10 risers were FTSE 100 companies such as oil giants BP and Shell benefiting from the surge in the price of crude following the launch of a war by the US and Israel against Iran on 28 February.

Henderson and Foll took advantage of the poor sentiment to domestic stocks by adding quality companies on low valuations such as builders’ supplier Alumasc, defence contractor Cohort and real estate investment trusts Segro and Hammerson trading on unjustifiably wide discounts. There were also opportunities in larger companies with the managers buying into data analytics firm RELX after its shares slumped on exaggerated fears that artificial intelligence would disrupt its business.

Dividends of 3.425p were declared or paid, an increase of 4.5% on a year ago putting Lowland on a 4.3% yield. Earnings per share of 2.64p, up from 2.06p, were insufficient to cover the pay-out although the company was not concerned as its earnings are “heavily weighted” to the second half.

Our view

Matthew Read, senior analyst at QuotedData, said: “These are a reasonable set of results for Lowland given the volatility we saw during the period and it is no great surprise that it has modestly underperformed its benchmark, given its bias to small caps, although having a decent exposure to oil has helped following the outbreak of war in Iran, as has exposure to a couple of takeover targets.

“What is perhaps more interesting is that the managers see recent weakness in UK smaller companies as an opportunity, adding to selected UK cyclicals, property and companies exposed to AI-related disruption fears. This includes names such as RELX which has had a particularly tough time, but Lowland’s managers believe this is a high-quality company that will not be disrupted to the extent the market is predicting.”

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