Schroder UK Mid Cap misses real estate rally to lag index

The trust trails its benchmark index after avoiding highly indebted companies, such as those in the real estate sector, which performed well.

Missing out on the real estate rally meant Schroder UK Mid Cap (SCP ) performance lagged its FTSE 250 ex-investment trusts index benchmark despite annual portfolio growth of more than 17%.

The £209m trust delivered a net asset value (NAV) total return of 17.3% in the 12 months to the end of September while its shares were up 17.5%, trailing the benchmark’s 21.4% increase, annual results show. 

Managers Andy Brough and Jean Roche blamed an underweight to both the real estate sector and more highly indebted companies for the lag, but said that ‘given a preference for stronger balance sheets, investors in the strategy should not find this surprising’.

In particular, an underweight to housebuilder Vistry (VTY) was particularly unhelpful and Brough and Roche regretted selling the stock ‘too soon, only halfway into what turned out to be an energetic rally, though some of the proceeds were reinvested into increasing the holding size in housebuilder Redrow (RDW)’.

Since the sale of Vistry, it has suffered a profit warning and a 20% downgrade to profit expectations while Redrow became the takeover target of Barrett Developments (BDEV) at a significant premium. After the Barratt bid, Redrow was sold and the money reinvested into housebuilder Crest Nicholson (CRST), which received a bid from Bellway (BWY) that went nowhere.

‘Although the bid approach for Crest from peer Bellway which temporarily lifted the shares has since fallen away, the supply-demand equation for the sector, alongside self-help potential, underpins our investment theses,’ said the managers. ‘Crest also has a new chief executive so we see in this a catalyst for change.’

Chemicals group Victrex (VCT) was the worst performer over the year on the back of a ‘weak industrial backdrop and lower than expected demand in the higher margin medical division’ that hit earnings.

However, Brough and Roche remain optimistic and said that the company is ‘well invested at this point, so any recovery in end markets should be seen quickly and, in the meantime, we expected to see a strong improvement in cash generated by the business’.

New stock Zegona Communications (ZEG), a telecoms investor, contributed the most to performance, soaring 137% over the year and proving why it deserved a place in the portfolio.

The managers participated in fundraising by the group, which buys telecoms assets, restructures them and sells them. IT acquired the Spanish assets of Vodafone (VOD) over the year and is now in negotiations for two potential fibre broadband joint ventures with Telefonica and MasOrange.

New positions were also taken in pharmaceutical business Indivior (INDV) and Mony Group (MONY), previously Moneysupermarket, but the former did not add to the portfolio.

The maker of opioid addiction treatments is battling against a competitor and has faced problems with Medicare and Medicaid in the US.

Brough and Roche said the share price is, however, ‘underpinned by rolling buybacks’ and the company is a ‘unique investment opportunity’.

Biotechnology group PureTech Health (PTEC) also made it into the portfolio on the back of its $400m cash pile relative to a market cap of $470m at the time of investment. Its schizophrenia treatment has recently been approved in the US, the first targeting this illness to be approved in 50 years.

‘Not only does this trigger a milestone payment for PureTech, it also shows the potential of the company’s drug development team and process,’ said the managers.

Electrical retailer Currys (CURY) was added on the back of optimism around a strong UK consumer and increased demand in coming years for AI-enabled equipment.

Christopher Brown, investment trust analyst at JPMorgan Cazenove said the Schroder trust was ‘unusual’ among its peers in that it invests only in the FTSE 250 versus peers which have broader, more flexible mandates.

He said the trust has outperformed its benchmark on a rolling five-year basis but lagged the peer group ‘suggesting having a broader mandate might have been beneficial over this period’.

The trust currently trades at a double-digit discount of 11.6% to NAV but this is in line with peers.

‘This is mostly because over the past five years the peers have de-rated, with SCP having fairly consistently traded around its current rating,’ Brown said.