Just two investment trusts managed to outperform the Numis Smaller Companies ex Investment Trust index over the last two calendar years, according to the latest FE Trustnet study.
The last two years were a tumultuous time for UK investors as markets have struggled to deal with the impact of the Brexit referendum in June 2016 sending the market – and particularly mid- and small-caps – plummeting initially.
However, since the vote UK stocks have, to the surprise of many, proved more resilient, as the below chart shows.
Performance of indices since Jan 2016
Source: FE Analytics
Despite lower levels of growth for large- and mid-cap stocks over the period, no investment trusts in the IT UK All Companies or IT UK Equity Income sector have outperformed the FTSE All Share index.
While the index – which aims to represent 98 per cent of the full capital value of all listed UK companies – is more highly weighted to large-caps, active fund managers tend to fish more at the lower end of the FTSE 100 and in the FTSE 250 as there are more opportunities for growth and the correlation to the benchmark is lower.
Additionally, large sector rotations into sectors that active fund managers are typically underweight such as miners, energy and bank stocks have also impacted investment trust performance.
Having fallen further than its large-cap peers in the wake of the referendum result, the Numis Smaller Companies ex IT index – a commonly-used small-cap benchmark – has since outperformed its peers further up the market capitalisation scale, most notably the blue-chip FTSE 100 and mid-cap FTSE 250 indices.
And, with no IT UK All Companies or IT UK Equity Income trusts outperforming the FTSE All Share over both 2016 and 2017, below FE Trustnet explores the IT UK Smaller Companies sector trusts to outperform the small-cap index over both calendar years.
Previously we have also looked at the IT Global investment companies that beat the MSCI World index in both 2016 and 2017.
Rights & Issues Investment Trust
The best performing UK smaller companies investment trust since the start of 2016 is the five FE Crown-rated Rights & Issues Investment Trust run by Simon Knott.
“Simon is a traditional value-investor who takes a long-term, low-turnover approach and tends to focus at the very bottom end of the market cap spectrum,” analysts at Kepler Intelligence Trust noted.
“His main aim is to buy companies with strong balance sheets, attractive dividend yields and are trading at a discount to what he deems to the business’ intrinsic value.”
The trust is a concentrated portfolio of between 20 and 30 stocks with an historic annual turnover of just 2 per cent.
Over the period the £172m trust has returned 68.86 per cent, as the below chart shows. In 2016 the trust returned 42.34 while last year it made 22.61 per cent.
Performance of trust vs sector & benchmark since Jan 2016
Source: FE Analytics
“This trust isn’t for the fainthearted and this is further reflected in its sector exposure. It may come as little surprise given its highly-concentrated nature, but the trust has no holdings in the financial services, real estate, consumer defensives, healthcare, communications services and energy sectors,” the analysts added.
“Instead, industrials, consumer cyclicals and basic materials account or 94.9 per cent of the portfolio, further adding to its risk profile.”
The trust has previously not been marketed which, along with its “sticky shareholder base” and historically complicated structure of both income and capital shares, has contributed to its shares discount to net asset value (NAV) being quite volatile, they added.
However, recently the board has done away with the capital shares making one single income share class and has implemented a discount control mechanism, buying back shares if the discount is wider than 10 per cent.
Its shares are currently trading at a discount of 10.1 per cent, according to the Association of Investment Companies (AIC), though this has come down from over 25 per cent in early 2016. The trust has a dividend yield of 1.5 per cent and ongoing charges of 0.45 per cent
Invesco Perpetual UK Smaller Companies
The other trust that outperformed the Numis Smaller Companies ex IT index in both calendar years is the four FE Crown-rated Invesco Perpetual UK Smaller Companies trust.
Run by Jonathan Brown and Robin West, the investment company has returned 35.24 per cent since the start of 2016 though it has made a 6.88 per cent loss so far this year.
In 2016 it returned 11.38 per cent while last year it made 30.39 per cent, as the below chart shows.
Performance of trust vs sector and benchmark in past 2 calendar years
Source: FE Analytics
Analysts at JP Morgan Cazenove noted: “[The trust] has continued to make steady progress in NAV terms with continued good performance versus the benchmark and AIC peer group average.
“Though the company itself is smaller post its tender offer, it continues to have reasonable ongoing charges versus its peer group, albeit it is one of the trusts with a performance fee but that is not uncommon in the peer group with around half the trusts having performance fees.”
For investors looking to buy the trust, they said that while it has performed well in NAV terms and has good measures in place to defend its discount there are trusts in the sector with similar positioning in terms of investment style but which currently trade at much wider discounts.
As such, the analysts are neutral on the investment company, though they highlighted the attraction of its high dividend yield, which is partly funded out of capital.
“[This] should help keep the discount relatively narrow in our view, provided NAV performance remains robust,” they said.
Invesco Perpetual UK Smaller Companies’ shares are on a 7.1 per cent discount to NAV according to the AIC. It has a yield of 4.9 per cent and has charges of 1.27 per cent including performance fees.