Invesco Perpetual UK Smaller Companies has announced its annual results for the year ended 31 January 2017. During the period, the company provided an NAV total return of 21.3% and a share price total return of 24.0%, both outperforming that of the company’s benchmark, the Numis Smaller Companies Index (excluding Investment Companies), which the company says provided a total return of 18.6%.
The board, chaired by Ian Barby (pictured), has been giving considering to the future of the Company and says that, says that in the light of what it describes as the company’s strong historical performance, the financial returns it has provided for shareholders and the outlook for the Company it will offer shareholders a continuation of their investment together with the alternative of a Tender Offer at a level close to NAV (reflecting a commitment it made in 2012). The Board proposes that, for shareholders wishing to retain their investment in the Company, the Company will continue to be managed by the portfolio managers in the same way that it is now. The board says that this will be consistent with the current dividend policy, and in the absence of unforeseen circumstances, it intends to pay a dividend for the year to 31 January 2018 of 17.1p per share, which equates to a yield of approximately 4% at the 2017 year end. The Board says that it may seek to limit discount volatility through the prudent use of share buy-backs and a further range of options will be put to shareholders on or around the annual general meeting in 2020.
For those shareholders wishing to realise part or all of their investment, the board says that they will have a chance to do so through a tender offer for up to 40% of the Company’s shares in issue. The full proposals are set out in a separate Circular to shareholders which accompanies the annual financial report.
Looking at the year under review, the manager (Jonathan Brown) highlights that the UK stock market, as measured by the FTSE All-Share Index, returned 20.1% on a total return basis. He says that this very strong outcome is largely attributable to the significant fall in sterling prompted by the decision to leave the EU and that sectors with significant non-UK revenues were the biggest contributors to market returns, in particular the mining and oil & gas sectors, which also benefited from higher commodity prices. Jonathan says that UK smaller companies, as measured by the Numis Smaller Companies Index (excl. Investment Companies), gained 18.6% on a total return basis but comments that Smaller companies tend to have less overseas exposure and therefore enjoyed less of a currency related gain. However, the mining sector, which had a heavier weighting than usual this year, contributed around 6.5% to the index return.
In terms of performance attribution, the manager says that positive contributions came from retail and healthcare, while the portfolio’s lack of exposure to the mining sector negatively impacted performance. At the individual stock level, he says that the stand-out performer was on-line fashion retailer boohoo.com (+256%). He says that its keenly priced “fast fashion” continued to be a hit with consumers as the business rapidly grew sales both in the UK and overseas and that, as the stock has been a strong performer for the last two of years, he has locked-in some profit and reduced the position. Keywords Studios (+168%), provides outsourced services to the computer games industry. The manager says that it had another good year driven by a combination of organic growth and acquisitions. The demand for games continues to grow around the world, which along with increasing complexity is providing a fertile market for Keyword Studios’ language translation and art creation services. Coats (+157%), is described by the manager as the world’s leading manufacturer of industrial threads. Ithaca Energy (+407%), a North Sea oil & gas producer, was one of the worst performers during the previous year but bounced back along with the oil price. The business also received a takeover approach following the year end.
In terms of detractors, the manager says that Carpetright (–53%), suffered from increased competition and a higher cost of goods due to the fall in sterling. The manager says that the company is still reducing costs by rationalising its store estate and is seeing improved trading as a result of its refurbishment programme, leading him for the time being to maintain teh holding. Diversified manufacturing business Essentra (–44%), struggled due to management problems. He is hopeful that the new CEO can get to grips with the issues and return the business to growth. The UK’s leading tile retailer, Topps Tiles (–38%), experienced slower growth following the EU referendum and a slowdown in the housing market. The manager says that the fall in the share price feels overdone and he is confident that the company can continue to take market share.
In terms of outlook, the manager says that the global economy is in reasonable shape. Both Japan and the Eurozone are experiencing a pick-up in economic growth, and the reflationary rhetoric emanating from the US suggests the potential for high growth there too. The UK economy has shrugged off the Brexit uncertainty so far and, although we are likely to experience increased inflation over the coming year, the continued record levels of employment should be supportive of consumer confidence. Exporting businesses should continue to benefit from weak sterling and the weak currency also increases the attractiveness of UK business to overseas acquirers. In the event of an economic downturn, the Government appears ready to stimulate the economy through increased infrastructure spending. So, notwithstanding political interference, the economic backdrop looks reasonably favourable.
In the manager’s view, there is no doubt that we are in a period of heightened political uncertainty. A combination of the UK “snap” election, protracted Brexit negotiations, the possibility now raised of a second Scottish referendum, key elections in France and Germany and the potential for significant changes in the US approach to global trade could lead to increased volatility within equity markets. The manager says that his investment approach seeks out companies that can shape their own destiny rather than rely on general market growth and that he believes that these kinds of businesses are well positioned to navigate current variable politico-economic conditions.
Invesco Perpetual UK Smallers outperforms benchmark and proposes 40% tender : IPU