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Investment trust insider on UK mid caps

Investment Trust Insider on Perpetual Income and Growth

Investment trust insider on UK mid caps – James Carthew: my pick of the three UK mid-cap trusts

Stock markets appear to be calming down, although we shouldn’t take a recovery for granted given the scale of the disruption that the global economy is experiencing. Across the investment company sector, many closed-end funds seem to trade on tighter discounts or higher premiums than they were before the panic set in. Some trusts have staged remarkable recoveries. For example, I am kicking myself that I didn’t buy Scottish Mortgage (SMT) last month. Its share price is now up over the year to date. Some trusts have fared less well, however, amongst them UK trusts.

The UK market has been the worst performing developed market in 2020, bar Belgium and Italy. It wasn’t particularly highly favoured beforehand either with the return on the MSCI UK index lagging that of the MSCI World benchmark by a whopping 80% over the ten years to the end of March. As I have pointed out before, the UK market is not particularly representative of UK plc, however. To get a sense of how the UK is perceived by international investors, it is better to look at the ‘mid-cap’ FTSE 250 index of companies outside the FTSE 100.

Three trusts have a particular bias to this part of the market. Each has delivered impressive outperformance over the long term, demonstrating the strengths of both active management and the investment trust structure. All three offer attractive yields. The highest of these (4.7%) comes from Schroder UK Mid Cap (SCP), managed by Andy Brough and Jean Roche, but there must be a question mark over whether this is sustainable in the current environment. However, SCP does have a year-and-a-half’s dividend in reserve which it could use to maintain or even increase its distribution if it chooses.

The largest of the three with a market value of almost £1.7bn is Mercantile (MRC), managed by Guy Anderson and Anthony Lynch at JPMorgan Asset Management, which covers both the mid-cap and the top end of the ‘small cap’. It is back trading at asset value, but at 173p, its shares are still 37% off their February high. It has underperformed both the 250 index and the smaller company index over that period. A little of this can be attributed to gearing but with borrowing of just 5% at the end of January, this was not the major factor.

The problem likely lies with the trust’s big positions in specialist financials, housebuilders and retailers. Many of those stocks in Mercantile’s portfolio have halved in recent weeks. Intermediate Capital, for example, has dropped from a high of £18.96 on 21 February to 926p today. Unfortunately, this was Mercantile’s largest holding.

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