Schroder UK Growth’s results for the year ended 30 April 2016 show that the Company’s NAV returned -4.4%, while the share price returned -4.9%. This compares with an equivalent return of -5.7% by the FTSE All-Share Index over the same period. The Directors have declared a second interim dividend of 2.60p per share, making a total of 5.20p per share for the year, an increase of 4.0% over total ordinary dividends of 5.00p per share paid in respect of the previous year.
The manager’s report says an overweight in software and computer services was a significant positive contributor to the performance of the fund, with Sage, Fidessa, iomart and Computacenter performing particularly well. Accounting and payroll software provider Sage is one year into a significant transformation programme with central costs being reduced, alongside investment into R&D and Sales and Marketing. Robust trading results confirming strong organic revenue growth and stable profit margins reassured the market and increased confidence in the strategy of driving higher, more subscription and cloud-focussed growth.
Trading software provider Fidessa performed well, particularly in Q1 2016 following reassuring full year results. Evidence is emerging that the impact of the difficult trading backdrop for equity customers is transitioning from being a historic headwind (as customers closed their operations) to represent an opportunity, as customers use Fidessa’s software to reduce costs. The significant investment in developing a global derivatives trading platform offers significant underappreciated value.
IT infrastructure services group Computacenter performed well, notably in Q4 2016 after announcing robust Q3 results, confirming its status as a resilient cash-generative growth company. A strong net cash balance puts the group in a good position to return cash to shareholders. Cloud Services company iomart delivered strong organic growth supplemented by acquisitions in cloud consultancy and webhosting. With high recurring revenue and a strong balance sheet, the group is well-positioned to succeed in an increasingly complex market as public/hybrid cloud grows.
An overweight to the tobacco sector, and particularly to Imperial Brands, was another positive. It performed well driven by earnings upgrades from improving organic sales momentum and its acquisition of US brands from Reynolds Tobacco. As confidence grew in its ability to sustain its 10% per annum dividend growth target the shares have been re-rated more in line with their peer group.
The fund’s media holdings performed well. They are attracted to the high return on capital and cash generation that the sector produces. Business information group RELX produced its customary consistent operating performance and the shares broadly tracked the strong, cash backed earnings growth that the market has become used to. Publishing group Informa is undergoing a restructuring plan which is turning around the business faster than expected, particularly in its underperforming Business Intelligence and Knowledge & Networking divisions. Investment to drive growth is paying dividends as the new management have delivered stronger organic growth and cash generation than forecast.
From a sector perspective beverages had the largest negative impact on the fund’s relative performance, in particular not owning SABMiller. Companies selling staple goods have rerated strongly in a world of low nominal growth and uncertainty over the economic outlook. They believed that the rating of SABMiller more than reflected the organic growth it was delivering. However, the approach from AB InBev last year detracted from the relative performance of the portfolio.
Exposure to banks was also a notable detractor. Whilst the portfolio benefited from being underweight Standard Chartered and HSBC, our holdings in The Royal Bank of Scotland (RBS) and Barclays more than offset such benefits. While the result of the EU Referendum has added more uncertainty to their future, they continue to believe the sector offers long term value and we are reaching a point where the value leakage from capital and conduct litigation is reaching an endpoint.
RBS endured a tough 12 months of share price performance, as it revealed its eighth consecutive year of losses and cautioned that it would have to delay resuming dividend payments or share buybacks beyond the first quarter of 2017. The decision to delay returning capital was in order to gain clarity over the quantum of its conduct fine relating to US mortgage-backed security mis-selling, as well to complete the disposal of Williams & Glyn. However, they remain positive, given the strength of its capital position and its strong domestic retail and commercial franchises which we believe will become increasingly apparent as the group restructures the underperforming Ulster, Investment and Private Banking divisions.
Barclays published disappointing fourth-quarter results, including a 50% reduction in the dividend over the next two years and the divestment of its African business in order to protect its capital position. The relative weakness of its capital position and exposure to more volatile investment banking business meant we had a preference for Lloyds and RBS.
During the course of the year their concerns towards the mining sector grew. Whilst the sector represents one the cheapest in the market on the basis of price to 10 year average earnings, reduced costs and capex have not resulted in increased profitability. Given the long-term nature of the industry, capacity is still coming on stream while demand, particularly from China, has weakened. Long-term structural headwinds persist as Chinese fixed asset investment looks historically high and debt levels within the economy have risen sharply. They exited Rio Tinto and Glencore to reflect these concerns.
SDU : IT exposure benefits Schroder UK Growth