Still time to cash in on small and mid cap rally, says Oriel

Discounts are closing fast among investment trusts exposed to small and mid cap companies according to Iain Scouller, analyst at Oriel Securities, who thinks strong returns from this type of trust have prompted growing interest among investors.

He says that many investment trusts have seen their net asset value (NAV) increase by up to 20 per cent.

“As we would expect in a sector with upward momentum, there has been some narrowing of the smaller company average sector discount,” he said.

“On a size-weighted basis, the average sector discount has narrowed from an average of 17 per cent over the past year to a 14% discount. This compares with the average discount being as wide as 19 per cent earlier in the year.”

Scouller says UK small and mid-caps have performed very well against their larger counterparts.

“UK small and mid-cap companies are having a good 2012, with strong outperformance relative to larger companies.”

He added: “Since the start of January, to the 17th October the FTSE 250 has risen by 20 per cent and the FTSE Small Cap 25 per cent. This is significantly ahead of the FTSE 100 which rose by 6 per cent over the same period.

According to FE Analytics, over the last 12 months the FTSE 250 Index and the FTSE Small Cap Index have returned 22.21 per cent and 20.54 per cent respectively. However, the FTSE 100 has returned 13.67 per cent.

Performances of indices over 1yr


Source: FE Analytics

Scouller highlights a number of investment trusts that he thinks have further to go.

“Despite the re-rating, there remains value in the sector with many trusts with strong records and well known managers still on mid-teen discounts.”

“Our preferred funds include Henderson Smaller – which has a discount of 17 per cent - with a consistent long term record,” he said.

“Throgmorton Trust – with a discount of 18 per cent - also has a good record, and the managers are Mike Prentis and Richard Plackett. Throgmorton has the ability to add-value by taking short positions, through the use of CFDs,” he finished.

Performance of trusts versus sector over 1yr

Source: FE Analytics

According to FE Analytics, the Throgmorton trust has returned 19.60 per cent over the last year and the AIC UK Smaller Companies sector has returned 18.05 per cent.

The other trust Scouller prefer, Henderson Smaller Companies, has a better track record over a longer period.

The trust has returned 35.50 per cent over the last year and has top quartile performances over 1, 5 and 10 year periods.