Schroder UK Growth Fund has announced its interim results for the six-months ended 31 October 2015. During the period, the Company’s NAV produced a total return of -5.3%, marginally outperforming its benchmark, the FTSE All-Share Index, which provided a total return of -5.7%. The share price produced a total return of -5.7%. The company has declared a first interim dividend of 2.60p per share for the year ending 30 April 2016 (2015: 2.50p).
In terms of individual contributions to performance, cruise line operator Carnival was the Company’s top contributor. The manager say that the company’s second-quarter results served to underline a gradual recovery in depressed yields on the back of solid demand and industry capital discipline. The company has also been a beneficiary of the lower price of oil.
Accounting and payroll software provider Sage Group performed well in the run up to a robust set of full-year results. The manager believes that the market focused on the company’s resilient cash-generative growth potential, and the new management team meeting its organic revenue growth and operating profit margin targets, which underpinned an 8.1% increase in the final dividend.
Business information group RELX (previously Reed Elsevier) was another key contributor. The manager says that solid third-quarter results reiterating another year of underlying revenue, profit and earnings growth.
The fund also benefited from not owning miners Anglo American and BHP Billiton. However, not owning beverage company SABMiller (after it agreed to combine with AB InBev), and consumer goods group Reckitt Benckiser Group (as consumer goods shares did well) detracted from performance relative to the index. Additionally, the manager says that weak energy prices were a drag on Drax Group, the power generation business.
In terms of portftolio activity, Ladbrokes has been reduced following announcement of the proposed merger with Coral. The managers say that, although the deal offers cost synergies, Ladbrokes’ balance sheet deterioration leaves little downside protection pre and post-merger.
Following strong share price performances, the manager has reduced holdings in housebuilders Crest Nicholson and Taylor Wimpey, and exited positions in the London Stock Exchange Group and Regus. Similarly reductions have been made in QinetiQ Group, enterprise software group Sage Group, wealth manager St. James’s Place and BT. The manager says that these stocks have all performed well since their inclusion in the portfolio and the shares more fully reflect the outlook for the business.
Proceeds of these sales have been reinvested into shares which the manager believes have not performed as strongly, including in the aerospace and defence sector, eg BAE Systems. The manager took advantage of volatility in oil and gas service names by adding Wood Group to the portfolio. The manager says that the valuation appears to be discounting a significant downturn in profits, and given the strength of its balance sheet the company looks well positioned to withstand this.
The holding in Daily Mail and General Trust was added to following the full-year results and in the wake of share price weakness. The manager considers that their new digital information service for the insurance industry, RMS (one), offers significant long-term potential. The manager has also added to GlaxoSmithKline on the view that the growth drivers for its HIV/Aids drugs, vaccines and consumer health business are being overlooked by the market.
Elsewhere, the manager added to the positions in Partnership Assurance Group and Just Retirement Group. The manager say that these companies operate in the enhanced annuity space, which has suffered following the pension reforms in the 2014 budget, and the market has welcomed their decision to unite and simultaneously raise new capital. In the manager’s view, there are tentative signs that the falls in the individual annuity market have bottomed and could begin to offer a renewed avenue for growth to complement the bulk purchase annuity market where they have recently focused their attention.
In terms of outlook, the manager says that the Company’s portfolio is cautiously positioned, and gearing is not currently being utilised as they are concerned that the valuation for the average stock in the market remains high.
The manager holds the view that the prospects for the market’s more domestically-focused companies remain reasonably positive, although this has not gone unrecognised by the market. Falling unemployment and signs of real wage growth coming through should support the British consumer. Interest rate rises, when they materialise, have been well telegraphed and are likely to be relatively small. However, the impact of a rising minimum wage is likely to act as a headwind to profit growth for many companies exposed to this favourable demand backdrop and increased volatility is anticipated as the vote on Britain’s position within the EU approaches. Taking a more global viewpoint the market is struggling to make progress as liquidity is removed from the US economy. The impact of an appreciating currency and the prospect of rising US interest rates is not only tempering the outlook for US corporate profits but is also leading to knock-on effects in emerging markets and the commodity complex.
The managers say that they are looking for companies that appear cheap in a cyclical context and which have the potential to produce decent returns on capital and ultimately cash returns to shareholders over the medium term. Defence and pharmaceutical companies and domestic banks appear to be good examples of this at the current time.
Schroder UK Growth mildly outperforms benchmark : SDU