Invesco Perpetual UK Smaller Companies (IPU) announced its annual results for the period ended 31 Jan 2024. The company saw NAV total return of -4.1%, slightly worse than the benchmark fall of -3.3%. Shares fell -3.1% while the discount narrowed to 11.1%. Longer term performance remains positive, with the cumulative NAV total return over the past 5 years of 18.8% comfortably ahead of the benchmark return of 9.8%, whilst over 10 years the company’s return has been 85.4%, surpassing the benchmark return of 40.4%.
Commenting on the performance, chair Bridget Guerin noted that throughout the earlier stages of 2023, the influence of the ongoing Ukraine/Russia conflict and the cost-of-living crisis persisted with heightened inflation and interest rates, making for a very tough environment for company profits and the UK consumer. Promisingly, she noted, expectations of future inflation and interest rates appear to have peaked in the UK, however, the UK’s economic backdrop continues to be mixed.
Regarding the outlook, portfolio managers Jonathan Brown & Robin West commented:
“Although the current level of economic growth in the UK is anaemic, we believe the situation should improve over the coming year. Forward looking indicators suggest the service sector, a significant driver of the UK economy, is returning to growth. The UK also continues to benefit from full employment, which along with falling inflation, lower energy costs and higher wages should lead to an improved outlook for the consumer sector.
“The industrial sector has struggled as businesses reduce inventories. Many businesses had carried buffer stocks to cope with supply chain disruption following the pandemic. With lead times normalising, businesses have reduced these stocks, leading to lower demand elsewhere. Recent conversations with businesses suggest that this process has largely run its course, so an industrial sector recovery will hopefully emerge as the year progresses.
“The valuation attractions of the UK smaller companies sector is very evident to us. Whether we compare current valuations to history, or to other international markets, the sector looks anomalously cheap. The value on offer has not gone unnoticed, with corporate and private equity buyers stepping in to take advantage. A surge in takeover activity is often a prelude to a stronger market, as the proceeds from these bids are redeployed into other stocks in the sector.
“Whilst the news headlines are dominated by doom and gloom, we see a nascent economic recovery and a market offering considerable value. So, after a difficult few years for the sector, we feel optimistic about the year ahead.”
IPU : Invesco Perpetual UK Smaller Companies sees a modest drop in NAV