Invesco Perpetual UK Smaller gives up some of outperformance

Invesco Perpetual UK Smaller Companies says that for the year ended 31 January 2022 the trust returned +18.8% in NAV terms, outperforming its benchmark index, the Numis Smaller Companies (excluding Investment Companies) Index, which returned +15.1%. Shareholders did even better, with a return for the year of 21.9%. That has reversed a little since – at 19 April 2022, the discount stands at 12.2% and the share price has fallen by 6.1%, the NAV has fallen by 6.6% and the new benchmark index (which now includes AIM) is down by 4.1% over the period between 1 February and 19 April 2022.

Total dividend for the year is 22.80p up from 19.32p. Revenue contributed 8.3p of this with the balance coming from capital.

The manager’s report comes in the form of a Q&A – here’s an extract

Q          What were the key influences on the market over the period?

A          The Covid-19 pandemic was once again the dominant feature. The vaccination effort and optimism that the worst of the crisis was over drove markets higher, led by the stocks that had suffered most over the prior year. A rapid rebound in economic activity, combined with an inventory rebuild and ongoing supply constraints, pushed inflation to multi decade highs. However central banks have been relatively cautious in their response, in part due to a hope that this inflationary period will be transitory, but also due to fears of choking off the nascent economic recovery. Nevertheless, the sharp sell-off in highly valued growth stocks at the end of the period suggests the market is pricing in a significant rate tightening cycle over the coming year.

Q          How did the portfolio perform over the period?

A          The NAV total return for the portfolio over the period was +18.8%, which compared favourably with the benchmark index, the Numis Smaller Companies (excluding Investment Companies) Index, which returned 15.1% on the same basis.

Q          Which stocks contributed to and detracted from performance?

A          The best performing stocks over the period included: Future (+81%) a publisher of online and magazine content, which continued to perform strongly. Its strategy of driving revenue through digital advertising and e-commerce has generated significant organic growth which has been boosted by earnings accretive acquisitions. Alpha Financial Markets Consulting (+77%) offers consultancy services to the fund management and financial sectors. The business has branched out into new areas such as insurance and benefitted from consolidation in the fund management sector and the ever increasing burden of regulation that its customers have to deal with. Volution (+71%) produces a range of ventilation products and is best known in the UK for its Manrose and Vent-Axia brands. The company benefitted from a rebound in the building sector, and an increased focus on indoor air quality due to the pandemic.

The portfolio also benefitted from several takeover approaches, including financial administration business Sanne (+65%), debt recovery company Arrow Global (+45%), defence business Ultra Electronics (+45%), and marketing company M&C Saatchi (+87%). We regard this as a validation of our  approach of investing in good businesses at sensible valuations.

Inevitably there were also some poorly performing holdings: marine services business, James Fisher (–62%), was our worst performing stock by some margin. The business suffered from Covid-19 related disruption to some of its activities such as the construction of off-shore wind farms. We have known  the business for many years and believe it has the potential to recover from its current level, so we have maintained a holding. Some of our holdings also suffered in the sell-off towards the end of the period. Language translation business RWS (–12%), and financial software business Aptitude Software (– 9%) were both impacted. We believe the prospects for these businesses remain good and we continue to own them in the portfolio.

IPU : Invesco Perpetual UK Smaller gives up some of outperformance

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