Invesco Perpetual UK Smaller Companies Trust

Last updated 21 March 2019
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A UK smaller companies fund which aims to achieve above average returns through the cycle with lower volatility...

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Invesco Perpetual UK Smaller Companies Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Invesco Perpetual UK Smaller Companies Trust

Jonathan Brown and Robin West are fundamental stock pickers, with a strong valuation discipline. The team were taking profits in more highly rated stocks in the year to the end of Q3 2018, and from Q4 were adding exposure to companies previously viewed as too expensive, post significant share price falls.

The managers aim to achieve above average returns (relative to peers) through the cycle with lower volatility. The strong performance so far in 2019 YTD with NAV returns +11.7% isn’t necessarily expected, given the historic pattern of returns where the managers typically lag very strong markets. We hazard that the strong relative performance over the past six months has been largely a result of the team’s focus on valuation and their trading activity.

Jonathan and Robin aim to identify companies which have a sustainable competitive advantage, a compelling proposition in a growing market, as well as good management and balance sheet strength. They look for businesses that have the potential to double in size over the next five years, and in typical Invesco Perpetual style, hold for the long term (valuations aside) – their typical annual turnover is 25% (the latest figure from Morningstar is 27.9%).

IPU’s portfolio typically comprises around 80-90 holdings, with no position allowed to get much bigger than 3% of NAV – an approach that the managers say means they can sleep at night. However, the current uncertain political environment has translated into a desire to invest in only those companies they have a high degree of confidence in. As a result, the number of holdings in the portfolio has dropped to only c 71 holdings currently.

The team usually take profits in stocks which they believe are over-valued, and which trade on very high multiples. Their approach has stood them in good stead since the start of Q4 2018. The portfolio has been performing especially strongly recently, and over both the short and medium term, the trust is currently in the top decile relative to peers over most periods.

Over the past five years, the trust has delivered a NAV total return of 62.3%, relative to the benchmark’s return of 30.3%, and has beaten the index in all of the past five calendar years. The managers have an alpha score of 4.6% pa over the same time frame. The degree of outperformance of the index over five years is significant, particularly so when you consider that the manager has achieved this without the use of leverage.

The dividend, which equates to a yield of 4.3%, is achieved by distributing all the available income arising from the portfolio, boosted by a small proportion from capital profits. This compares very favourably with other small company funds and trusts, but also those in the equity income sector. The fact that a proportion of the dividend comes from capital means that the managers have not had to tilt their investment approach to achieve this level of income for shareholders.

Relative to the index (and some peers) the trust continues to have more of a value angle, prompted by a view that Brexit has led to a global aversion to domestic UK exposure which means stocks are attractively valued. UK sales of the portfolio are currently estimated at c. 55%, relative to the benchmark of 65-70%. Reflecting their caution, the team has around 5% cash in the portfolio currently.

William Heathcoat Amory
William Heathcoat Amory is a co-founding partner of Kepler Partners LLP and leads the Kepler investment trust research team. William has 18 years of experience as an investment company analyst. Prior to co-founding Kepler Partners in 2008, he was part of the Extel number 1 rated research team at JPMorgan Cazenove.

Fund History

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Key facts

Investment objective

To achieve long-term total returns for shareholders primarily by investment in a broad cross-section of small to medium sized UK quoted companies.

As at:

19/03/2019

Group/Investment

Invesco Perpetual UK Smaller

Ticker

IPU

Management Company

Invesco

Manager Name

Jonathan Brown;Robin West;

Association of Investment Companies (AIC) Sector

UK Smaller Companies

12 Mo Yield

4.2%

Dividend Distribution Frequency

Quarterly



Latest Market Capitalisation

£163,766,866

Latest Net Gearing (Cum Fair)

-5%

Latest Ongoing Charge Ex Perf Fee %

0.82

Turnover Ratio %

28.0

Shares Outstanding

32,851,929

(Discount)/ Premium % (Cum Fair)

-3.4

Daily Closing Price

498.5p

Disclaimer

This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.

Kepler Partners is not authorised to make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.

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