Miton UK Microcap, BlackRock Throgmorton and Mercantile are among the investment trusts that could be attractive to investors who expect the UK to bounce back strongly in the Covid recovery, according to Kepler Partners’ Callum Stokeld. 
The UK stock market had been lagging behind its international peers for several years, until relatively recently, as investors were put off by the uncertainties created by Brexit and a lacklustre initial response to the pandemic.
However, since a number of effective coronavirus vaccines were announced in November, the UK has outperformed many of its international peers. Factors in the country’s favour include a successful vaccine rollout, resolution of Brexit and a bias towards the cyclical sectors that are expected to perform well after the pandemic.
Performance of regional indices since ‘Vaccine Monday’
Source: FE Analytics
Stokeld, an investment trust research analyst at Kepler Partners, noted that UK small- and mid-caps tend to outperform the FTSE All Share when the UK index is outperforming global equities
One explanation for this is that inflows to the UK market tend to push up sterling, which benefits small and mid-caps’ domestic earnings while hampering the more international-derived earnings of large-caps.
“Similarly, [the UK’s outperformance] will also tend to coincide with periods of optimism on the UK economic outlook relative to international peers, or a conviction on global reflationary forces gathering pace: both seem in place at this time, with the UK’s accelerated vaccine roll-out bringing closer anticipated pent-up demand, but also massive global efforts to stimulate economies,” he added.
When it comes to investment trusts that could perform well, Stokeld said these conditions “point us in several directions”. Below, he highlights four trusts that look particularly interesting in the current environment.
JPMorgan Mid Cap and The Mercantile Investment Trust
First up are JPMorgan Mid Cap and The Mercantile Investment Trust, which the Kepler analyst said offer relatively ‘pure’ exposure to the mid-cap market, while taking a balanced stylistic approach.
“Both have tended to do well in periods of UK outperformance historically, and at the minimum both should be reasonably expected to capture beta through deployment of gearing (which is relatively full in both at this time),” he explained.
Performance of trusts vs sector and index over 5yrs
Source: FE Analytics
JPMorgan Mid-Cap is managed by Georgina Brittain and Katen Patel, who have a strong long-term track record. Over the past decade, the trust has been the highest returner of the IT UK All Companies sector; it has also beaten its FTSE 250 ex Its benchmark over one, three and five years.
Brittain and Patel look to buy ‘structural winners’ for the portfolio, without overly concentrating on value or growth stocks. Top holdings at present include Games Workshop, Future and Bellway, while the trust has a significant overweight to consumer discretionary stocks.
The Mercantile Investment Trust is also run by JP Morgan Asset Management, with Anthony Lynch and Guy Anderson at the helm. Like JPMorgan Mid-Cap, it has a strong long-term record and has outperformed the FTSE 250 (although this is not its benchmark) over one, three, five and 10 years.
The process behind the trust see Lynch and Anderson looking for companies that possess a blend of three key characteristics: quality, valuation and momentum. Bellway, Softcat and Intermediate Capital are currently the three largest holdings.
JPMorgan Mid-Cap has ongoing charges of 0.88 per cent, is trading at a 3.8 per cent discount, is 8 per cent geared and yields 2.2 per cent. Mercantile Investment Trust has ongoing charges of 0.51 per cent, is trading at a 4.9 per cent discount, is 15 per cent geared and yields 2.5 per cent.
Stokeld described both trusts’ discounts as “not screamingly cheap entry points, but nor are they unattractive”.
BlackRock Throgmorton
Kepler Partners’ second pick was BlackRock Throgmorton, which is managed by Dan Whitestone and resides in the IT UK Smaller Companies sector.
The trust looks for “the UK’s most differentiated and exciting emerging companies” with strong management teams, strong and dominant market positions, but also has an interest in ‘disruptors’, or businesses that are changing their industry.
“A lot of these ran quite far and hard over much of 2020 and certainly, with the structural stories better understood by the market, valuations have moved higher. It was unsurprising that Throgmorton trailed peers (despite absolute gains) in the initial post-vaccine rally in November; many of its companies were perceived as ‘Covid winners’,” Stokeld said.
“And yet, as reopening broadens (domestically and across the globe), more opportunities will arise for expanding companies, and the emphasis Throgmorton’s manager places on balance sheet robustness should mean the underlying companies have plenty of optionality.”
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
The trust is in the IT UK Smaller Companies sector’s top quartile over three, five and 10 years, but has fallen down the relative rankings in recent months because of the above points. That said, it is still outperforming its benchmark over the short term as well as long term.
BlackRock Throgmorton has ongoing charges of 0.60 per cent (which rises to 1.61 per cent with its performance fee), is trading at a 0.5 per cent premium, is 25 per cent geared and yields 1.2 per cent.
Miton UK Microcap
While the above three trusts could be seen as the beneficiaries of a tactical, short-term shift towards the UK, Stokeld said fourth and final pick could be a good option for those that think this is indicative of broader long-term structural shifts.
“The manager of Miton UK Microcap has positioned his trust in recent years with precisely such a structural shift in mind. He has in mind a broader structural shift in international trade and market dynamics, and notes that the UK market is uniquely well-positioned from these shifts (which include increased reshoring, rising income growth and ultimately a return of higher inflationary pressures),” the Kepler analyst said.
“Given this would represent a seismic reversal of what a majority of market participants will have experienced for the entirety of their careers, if this transpires it is nonetheless likely to mean that relative returns will remain volatile as investors waver over the durability of the new direction.”
The trust was launched in 2015 with the plan of building a portfolio positioned for a change in the longer-term cycle, which would involve reshoring of businesses, rising wage inflation and a change in market leadership.
Performance of trust vs sector over 5yrs
Source: FE Analytics
While Gervais Williams and Martin Turner’s Miton UK Microcap trust has lagged behind its average IT UK Smaller Companies peer over the past five years, the coronavirus rebound has seen it jump to the top of the sector on a one-month view.
Miton UK Microcap has ongoing charges of 1.63 per cent, is trading at a 2.8 per cent discount, is not geared and yields 0.1 per cent.