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Schroder UK Mid Cap discount stubbornly wide

Schroder UK Mid Cap discount stubbornly wide – Schroder UK Mid Cap Fund says that, for the year ended 30 September 2017, its net asset value total return of 21.0% outperformed the benchmark by 6.8%. The dividend for the year is 13.10 pence per share, an increase of 16.4%.

Talking about the discount, the chairman said “It is disappointing that the discount remains at 17.0% despite the return to outperformance this year. Your Board believes that the most sustainable way to close the share price discount is to increase demand for the company’s shares by effective marketing over the longer term, and a continuation of the company’s strong longer term performance track record. In the meantime, the Board will continue to consider on a regular basis whether share purchases should be made, alongside other means of discount control.”

Manager’s statement extract

The manager says that “the top contributor was engineering business Renishaw. The market has continued to reward the company as potential growth opportunities from its metrology products become apparent. 

Travel food and beverage company SSP Group was another top contributor. The company, which is exposed to a key global structural growth trend of rising airline passenger numbers, published impressive results. The company continues to execute well, announcing new contracts and sustained positive like-for-like sales growth. The opening up of the American market and a new joint venture in India offer excellent growth prospects. 

Home emergency company Homeserve demonstrated the value of having an entrepreneurial founder Chief Executive with a large shareholding. Recent moves such as the acquisition of Checkatrade (online tradesman directory) in the UK and further expansion in the US reflect what management thinks the opportunities are. 

Veterinary products manufacturer Dechra Pharmaceuticals was also a notable performer as sales growth from recent acquisitions accelerated ahead of expectations, dovetailing with organic growth. This rare combination reflects a strong management team in a market which in turn continues to demonstrate structural growth. 

Redrow, along with the rest of the housebuilding sector, has recovered strongly since the Brexit vote. The fundamentals of the sector remain strong with demand continuing to be fuelled by help to buy and limited supply. 

The erstwhile holding in gold miner Acacia Mining, one of the top contributors last year, was the main detractor after a Tanzanian government report alleged the firm under-declared exported minerals. The company denied this, but given our view that resolution was unlikely to be swift, we sold the position.

The share price of IG Group, a provider of financial spread betting and contract for differences (“CFD”) was negatively impacted by the Financial Conduct Authority’s (“FCA”) proposal to tighten regulation around the provision of CFD products to UK retail customers. There has been no follow up from the initial FCA announcement. Meanwhile, the share price has started to recover following results which showed continued growth in customer numbers. 

Indivior fell after an adverse ruling from a US court about the introduction of potential competition to its main product. The company appealed and, since then, announced US Food and Drug Administration Panel Backing of its new monthly injectable product. The end market of the treatment of opioid addiction remains a problem of epic proportions in the US. 

Lastly, the holding in Dunelm detracted from relative performance. The market is adopting a wait-and-see approach with regard to the 2016 acquisition of online retailer Worldstores, a deal designed to make Dunelm more competitive online. Whilst the homewares market has been weak, it appears that Dunelm is continuing to take market share. It has set an ambitious GBP2bn sales target, in tandem with a strong Q1 trading update. Dunelm has an above average and well underpinned dividend yield. 

Turning to stocks not held, the fund benefitted from avoiding Dixons Carphone and Carillion. Along with the AA and Tullow Oil, all four have relatively high levels of gearing, which has magnified the fall in equity value. Finally, security services company G4S was the main missed opportunity.”

SCP : Schroder UK Mid Cap discount stubbornly wide

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