Schroder UK Mid Cap has published results for the six months ended 31 March 2016. The company’s net asset value produced a total return of 3.0%, compared to a total return of 2.2% for the company’s benchmark, the FTSE 250 (ex Investment Companies) Index. However the performance of the company’s share price disappointed during the period, producing a negative total return of 6.2% as the share price discount to underlying net asset value widened from 9.3% to 17.5%. The Board has declared the payment of an increased interim dividend of 2.75 pence per share (2015: 2.50 pence per share), for the year ending 30 September 2016.
As previously flagged, Andy Brough, who has co-managed the portfolio since Schroders was appointed Manager in May 2003, took over as lead portfolio manager on 31 March 2016 following Rosemary Banyard’s departure from Schroders. This is not expected to result in a material change to the Manager’s investment approach.
The Board has concluded that shareholders would benefit from a simplification of the management fee arrangements, and in particular the removal of the performance fee element. As a result they have agreed with the Manager that, with effect from 1 April 2016, the current management fee of 0.8% per annum on assets up to and including GBP75 million, and 0.6% per annum on the excess over GBP75 million, plus a performance fee, will be replaced by a single management fee of 0.7% per annum with no performance element. This will continue to be paid quarterly in arrears on total assets less current liabilities other than short term borrowings, provided that if there are any short term borrowings, the value of cash up to the level of such borrowings is deducted from the calculation of assets. The secretarial fee paid to Schroders is unaffected by this change.
Additionally, following a review of the notice period under the Alternative Investment Fund Manager Agreement against current market norms, it has been reduced from 12 months to six months, also with effect from 1 April 2016.
The manager’s report says the portfolio’s outperformance came from its stock selection, offset partly by the sector allocation. The strongest positive contribution came from Dechra, an international veterinary drugs group whose business is less cyclical and which is achieving good growth in the US. During the period, the company announced the acquisition of Putney, a leading developer of generic companion animal pharmaceuticals in the US. The deal will provide Dechra with access to Putney’s product portfolio and development pipeline whilst bolstering its US operations and infrastructure.
A holding in software and IT business Micro Focus performed well after the company published positive interim results and the market came to better appreciate the potential value of the SUSE open source operating system business, acquired as part of the Attachmate Group in 2014. This was despite the fact that Wizard, former private equity owners of Attachmate, sold down some of their stake in February. In late March, Micro Focus announced its intention to acquire mature software solutions company Serena, a deal which is in line with stated strategy and which, management expect, will increase earnings in the first half of 2017.
The top detractor, in terms of stocks held, was multi-utility supplier Telecom Plus, as weakness in energy prices continued to put pressure on its ability to compete with the big six. A reassuring trading statement in April has helped to alleviate some of this pressure.
Additionally, a holding in house builder Redrow was a negative performer. Its significant domestic exposure meant it was under pressure from uncertainty surrounding June’s referendum on UK membership of the European Union, despite delivering a strong set of interim results and raising its dividend by 67%. Furthermore, a position in property investment company CLS Holdings detracted from performance due to a sector rotation out of UK real estate, and at odds with a solid set of full year results.
The performance relative to the Index was also influenced by the stocks in the Index that the Company did not hold over the period. There were positive contributions from not owning Oil Services company Amec Foster Wheeler, London-exposed real estate company Capital & Counties, and highly-geared Cobham. Finally, not owning supermarket group WM Morrison negatively affected relative performance, whilst a bid was made for Rexam.
SCP : Schroder UK Mid Cap scraps performance fee