Schroder UK Mid Cap (SCP) reported annual results to 30 September 2020, with a total return of -7.7% in NAV terms representing better performance than the benchmark’s -15.3%. According to co-managers, Jean Roche and Andy Brough, the outperformance of the benchmark was due to stock selection, with gearing having a small negative effect. They note that “the quantum of the stock moves particularly striking: three of the top five contributors, for example, outperformed by 99% or more. Although the environment was patently different to the previous year’s, the top two positive contributors were again, remarkably, two domestic retailers, Dunelm and Pets at Home.”
‘Pets at Home helped by the surge in demand for pets’
Dividends from the portfolio holdings halved over the year. The NAV regained some of its earlier losses towards the end of the year. On the portfolio, Pets at Home Petcare specialist Pets at Home was helped by the surge in demand for pets following the shift to working from home. Some of the other notable holding highlights from the year, as outlined by the managers, included:
- “A new entrant to the top contributors was miniatures crafting and table-top war games business Games Workshop, a holding added in the previous financial year.
- Technology equipment and services business Computacenter was another strong contributor, as enterprises accelerated their digital transformations in response to the pandemic.
- Shares in Diploma, a supplier of essential, niche products and services to life sciences and industrials businesses responded particularly well to its acquisition of a cable and wire distributor in the US.
- Niche marine services business James Fisher was a significant detractor due to oil price weakness and COVID-19-related project delays and cancellations in its Marine Services division.
- Petrofac has appeared once more as a detractor of note, also affected by weakness in the Oil and Gas market and a Serious Fraud Office investigation which has not yet come to a conclusion. The company’s long-standing CEO is due to step down at the end of the year and his replacement also has a strong background in the important Middle Eastern market, which is reassuring.
- Housebuilder Crest Nicholson and casual dining specialist Restaurant Group were among the larger detractors as lockdown measures essentially brought these businesses to a standstill. More recently, however, there have been strong results from UK housebuilders as the importance of where one lives (and now, increasingly, works), has seemingly taken centre stage in the mind of the UK consumer. This was helped by initiatives such as the Stamp Duty holiday on the first £500,000 of all property sales, meaning a saving of up to
£15,000 for some buyers.”
Outlook
Jean and Andy note that “Looking back over the last year, the only thing we can say with certainty is “well, nobody expected that.” This has been a year of significant highs and lows, of human tragedy, volatility, of economics battling life sciences and of emotions running high. At the time of writing, two announcements on stage 3 trials of COVID-19 vaccines have driven a recovery in many of the shares sold off aggressively at the start of the pandemic. The US is preparing to welcome a new president, and Brexit deliberations are moving at an accelerated pace, as
is news flow on incoming UK M&A. We are not trying to second guess any of this: instead, we are focusing on making sure that we hold shares in companies which are either disruptors, changing the status quo within the marketplace, or established companies which can grow sustainably as they reinvent themselves in response to the disruption, companies which we refer to as long-term growth opportunity stocks. Neither do we target a specific level of gearing: future levels of gearing will be a function of the opportunities we see in the market. In the first few months of the pandemic, we were asked what new trends were emerging and if they would change our investment approach. This led us to examine our core long-term growth opportunity stocks, and whether we believed that the opportunities we saw previously would persist in a post-COVID-19 world. Trends which we observed early on do seem to be becoming established. The shift from store-based to online retail and more frequent working from home have accelerated, and been reflected in strong trading reported by Pets at Home, Computacenter and Dunelm as well as holdings such as multi-utility provider Telecom Plus, Games Workshop and self-storage specialist Safestore. Though many of these stocks have been coronavirus beneficiaries, we see them as able to continue to deliver sustainable growth post-pandemic.
News that the UK economy grew by 15.5% in Q3 has been dismissed by some commentators as merely the product of pent-up demand, but salaries are also, now, higher than they were in Q4 2019, which shows that fiscal transfers are supporting income (albeit at a cost). This in turn should support a strong recovery once the current lockdown eases.”
SCP: Schroder UK Mid Cap shows resilience against its benchmark