Schroder UK Mid Cap Fund has published its annual report for the year ended 30 September 2021. The NAV total return for the year was 41.8%, just ahead of the 40.9% produced by the 250 index (ex investment trusts). However, a narrowing discount (from 19.4% to 7.8% over the year) produced a share price total return of 62.6%. Total dividends for the year were 14.8p an increase of 11.3% on the prior year.
Extract from the managers’ report
“Distributor of building materials, Grafton, was the top contributor over the period. The company has significant exposure to the growing RMI (Repair, Maintain, Improve) market, which has continued to boom following the first pandemic related lockdown, especially within the private housing segment. Thus, the share price has recovered strongly, and then outperformed, since the indiscriminate, COVID-19 related, March 2020 sell off. The group reported record half year results thanks to a very strong performance from Woodie’s (Irish DIY and Home retail chain) and good contributions from the two acquisitions, Stairbox and IKH which took place in December and June 2021 respectively. Performance was also boosted with the agreement to divest the traditional merchant business to Huws Gray. This is all consistent with the management team’s strategy of divesting of lower margin businesses and using internally generated cash to acquire higher margin businesses with more pricing power.
Another lead contributor over the period was technology-enabled fund management company Man Group. The company reported record-high funds under management in quarter 3, predominantly driven by strong investment performance, which has driven serial earnings upgrades and ensuing double digit dividend growth. Continuing share buybacks would indicate to us that management see the shares as undervalued.
Commercial van & car hire, sale and repair and accident services (“mobility”) provider Redde Northgate performed well over the 12-month period. The stock was promoted back into the FTSE 250 in April after four years in the Small Cap Index. Management reported merger savings well head of target as part of its annual results publication in July. With residual values well supported by a well-publicised shortage of new vehicles, Redde Northgate has benefited. As part of its AGM statement in September, the group reported the signing of “new, sizeable, multi-year” contracts within its mobility platform, which are expected to go live in mid-2022.
The theme seemingly weighing on three of our most significant detractors, Dunelm, Pets at Home and Games Workshop is that of perceived lockdown winners from which the market is looking to move on. This is a bit strange in the case of Dunelm in particular, whose stores were closed for around one-third of the relevant period. As ever, we take a more long-term view: the structural growth trends which have made this trio among our top performers over the last two years, persist, namely strong online and in store sales growth, humanisation of pet ownership and monetisation of strong intellectual property (in the case of Games Workshop). Coming out of lockdown is good for business: Dunelm reported strengthening homewares market share as stores and in house cafes reopened, Pets at Home will benefit from an increased (+10%) number of pet cats and dogs in the UK, whose owners are more attuned to their needs than perhaps they might have been pre COVID-19, and Games Workshop’s existing stores can welcome customers again without interruption as international omnichannel expansion continues.
Utilities provider Telecom Plus also underperformed over the year. Shares rose early on in the period with the anticipation of positive half-year results. However, the results showed revenue was very marginally down driven by the lower energy price cap implemented by the regulator (Ofgem) last year. This situation has since reversed markedly as energy prices have soared, lifting the share price higher towards the end of the period. It is our expectation that as social circles reopen, Telecom Plus agents will be more easily able to sell their multi-utility product.
With the value of UK M&A deals in the first three quarters of 2021 about to surpass the whole of 2020, it’s no surprise that the two companies at the top of our stocks not held negative contributor table were both not just bid targets, but subjects of bidding wars. Specifically, defence engineer Meggitt and supermarket chain WM Morrison attracted competing bids from US competitors and US private equity firms respectively.
Meanwhile, not holding miner Centamin was a notable positive for the fund. Shares fell 58% from third quarter 2020 highs as guidance related to a shift in mining plans following movement in a localized area of waste material at its Sukari Mine. Lloyd’s insurer Hiscox suffered reputationally, and, ultimately, financially, from its exposure to pandemic related business interruption claims.”
SCP : Schroder UK Mid Cap benefits from narrower discount