UK Edition
We know that the stock market has recovered strongly from the depths of the coronavirus-induced sell-off in mid-March but it’s easily forgotten that not all parts of the market have bounced back to the same extent.
The FTSE 100 stands about 17pc below its pre-crisis level but the FTSE 250 index of medium-sized firms is more like 21pc lower.
Now, that may not strike you as an obvious bargain at a time of huge economic uncertainty but what if you could get exposure to this middle tier of the British economy a further 20pc or so more cheaply?
This is what, broadly speaking, you could do if you bought one investment trust that focuses on this part of the market.
The trust we have in mind is Schroder UK Mid Cap.
To be clear, it’s not in any way a “tracker” fund – it is actively managed by Andy Brough, who has been with the fund since 2003, and Jean Roche, who joined him in 2016. But the fund does, in the words of Iain Scouller, an investment trust analyst at Stifel, the stockbroker, “give you broad exposure to UK plc”.
“The trust has about 60 holdings, or only about one in four of the stocks in the index, but it is in every corner of the domestic economy,” he said.
What is striking is the discount. At 18.8pc, it is at the upper end of its range over the past year, 2pc-19pc, and not far off twice its 11pc average over the same period.
“This does seem reasonably wide,” Mr Scouller said. “It is driven by sentiment. Because FTSE 250 companies tend to be more focused on the domestic economy, they were very hard hit in March.”
If the market can continue its slow recovery from the depths seen then, as the lockdown is gradually eased, and if renewed appetite for medium-sized British stocks attracts buyers to this trust, investors could benefit twice over. And that’s before any possible extra gains from good stock selection on the part of the fund’s managers.
One reason for the trust’s wide discount could be its inclusion of “value” stocks, whose long-standing unpopularity has only deepened.
The fund is not an out-and-out value portfolio along the lines of Aberforth Smaller Companies, first tipped here in January 2018, but owns a mixture of value and growth stocks.
This too could put wind in its sails as we finally begin to move on from lockdown.
“Some value stocks have been under pressure because they often have weak balance sheets, which can accentuate problems during a recession,” said Mr Scouller. “And they are often income stocks, so those that have had to suspend their dividend have also been punished by investors.”
But concerns over the risks posed by weak balance sheets should ease once the economy picks up, he said, and the resumption of dividends should also be welcomed by the market.
The trust’s inclusion of value or income stocks has allowed it to pay a generous dividend: last year’s payment of 18.5p equates to a 4.4pc yield at the current share price.
We don’t of course know how much less income it will receive in dividends from its holdings this year, but the trust does have reserves equivalent to 150pc of last year’s payment, which its board could use to meet or at least reduce any shortfall.
The wide discount may not last, so this is an opportunity to take now.
Questor says: buy
Ticker: SCP
Share price at close: 420p
Update: India Capital Growth
We tipped this trust in March 2017 but its performance has been disappointing. Three adverse influences have come together: the market in which it invests, small and medium-sized Indian stocks, has performed badly; the trust’s own holdings have underperformed this market; and its discount has widened.
There is one compelling reason not to sell now, however. In 18 months’ time the trust will offer investors the opportunity to exit at no more than 6pc below net asset value, which would eliminate most of the losses that the current discount would inflict on shareholders.
Nick Greenwood of Miton, whose stake in the trust prompted our tip, said he would hold on until that opportunity. We suggest that readers do the same.
Questor says: hold
Ticker: IGC
Share price at close: 48.25p
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