The Mercantile Investment Trust has been one of the IT UK All Companies sector’s most consistent long-term outperformers, FE data suggests, while BlackRock Smaller Companies and Invesco Perpetual UK Smaller Companies have delivered strong results at the small-cap end of the market.
In a recent article, FE Trustnet reviewed the trusts in the IT Global sector to find out which have persistently generated first-quartile total returns for investors, finding that Lindsell Train IT, Scottish Mortgage and F&C Global Smaller Companies were among those coming out on top.
Given that most UK investors will have significant exposure to the domestic market, we now turn our attention to the IT UK All Companies and IT UK Smaller Companies sectors to find any strong performers there.
To recap, we looked at quartile rankings in 54 rolling 10-year periods (calculated on a quarterly basis) going back to 1995. The first period spans 1 April 1995 to 31 March 2005 then we move forward in three-month increments until we reach the period covering 1 July 2008 to 30 June 2018.
Rolling 10-year total return of trust vs sector
Source: FE Analytics
The chart above shows the IT UK All Companies member that came out on top. The Mercantile Investment Trust, which is managed by JP Morgan Asset Management’s Martin Hudson, Anthony Lynch and Guy Anderson, has been in the sector’s top quartile or 33 of the 54 decade-long periods examined, or 61.1 per cent of the time, and has no periods in the third or fourth quartile; its average 10-year quartile ranking stands at 1.4 per cent.
The £1.7bn trust is the largest in the peer group and concentrates on the mid-cap part of the market, counting the likes of FTSE 250-listed steam system engineer Spirax Sarco, specialist asset manager Intermediate Capital Group and residential property developer Bellway among its biggest holdings.
Analysts at Kepler Trust Intelligence said: “This is one of only a small selection of mid-cap focused investment trusts and has a strong track record of outperforming in positive periods for the market. It does tend to underperform when there are momentum shifts in the market, however, so timing an entry point might be important.
“In our view it is an attractive proposition for investors who are prepared to take an aggressive position in UK equity.”
Data from the Association of Investment Companies shows that The Mercantile Investment Trust has ongoing charges of 0.47 per cent, is trading on a 10.7 per cent discount to net asset value (NAV) and is yielding 2.8 per cent.
The IT UK All Companies trust with the next highest share of its track record in the top quartile over rolling 10-year time frames is Invesco Perpetual Select UK Equity (57.1 per cent). It also has an average 10-year quartile rank of 1.4 although it is important to note that its track record only covers seven of the 54 periods under review.
The £63.3m trust is managed by James Goldstone and is one of the four sub-portfolios of the Invesco Perpetual Select Trust. Goldstone looks for companies with strong balance sheets, high barriers to entry and the potential to grow market share; the top three holdings are Barclays, BP and Next.
Invesco Perpetual Select UK Equity has ongoing charges of 0.81 per cent, is trading on a 0.2 per cent premium to NAV and yields 3.6 per cent.
Rolling 10-year total return of trust vs sector and index
Source: FE Analytics
The only other fund to post an average 10-year quartile rank of below 2 is Fidelity Special Values, which scored 1.5. This trust, which has a track record spanning all 54 periods, was in the top quartile of the peer group 57.4 per cent of the time and hasn’t spent a 10-year period in the bottom quartile.
As its name suggests, the portfolio – which is headed by FE Alpha Manager Alex Wright – focuses on unloved UK companies where there is the potential for them to come back into favour. The largest holding at the moment is actually an overseas stock (US financials firm Citigroup) although UK names Royal Dutch Shell, Lloyds Banking Group and BP follow close behind.
Analysts at FundCalibre said: “Alex is an experienced manager and has a good track record and we see no reason why he will not continue to achieve these results. This trust should appeal to investors looking for a value play in UK, with a medium- to long-term time horizon.”
Fidelity Special Values has ongoing charges of 1.06 per cent, is trading on a 1.4 per cent premium and is yielding 1.7 per cent. It is 13 per cent geared, according to AIC figures.
Moving over to the IT UK Smaller Companies sector and only two of its members have an average quartile rank of below 2: BlackRock Smaller Companies IT and Invesco Perpetual UK Smaller Companies. Both have a track record that covers all 54 rolling 10-year periods we looked at in this research.
BlackRock Smaller Companies has an average quartile rank of 1.7 and has been in the peer group’s top quartile for 57 per cent of the periods under review. It did spend one 10-year period in the bottom quartile, which is less than 2 per cent of the overall time frame we looked at.
Managed by Roland Arnold (who only took over in May 2018), the trust has a bottom-up approach and looks for companies that are comparatively undervalued but have realistic growth prospects. The top five holdings are Robert Walters, Dechra Pharmaceuticals, YouGov, CVS Group and Polar Capital Holdings.
The trust has ongoing charges of 0.67, which rise to 0.93 per cent when the latest performance fee is included. It is trading on a 10.3 per cent discount, yields 1.8 per cent and is 7 per cent geared.
Rolling 10-year total returns of trust vs sector
Source: FE Analytics
Invesco Perpetual UK Smaller Companies is managed by Jonathan Brown with Robin West as deputy. This £167.2m trust has an average quartile ranking of 1.6 and spent 52 per cent of the 10-year periods examined in the top quartile, with none in the bottom quartile.
While small-caps are often seen as a riskier part of the market, this trust aims to achieve above average returns through the cycle with a lower volatility.
Kepler Trust Intelligence analysts said: “We continue to observe that Invesco Perpetual UK Smaller Companies marginally underperforms peers in sharp upward moves in the market, but tends to outperform when markets turn south. We believe this derives from the fact that the managers apply a consistent approach to stock picking, aiming to invest at all times in the cycle in only high-quality companies.”
Invesco Perpetual UK Smaller Companies has ongoing charges of 0.82 per cent (although this climbs to 2.03 per cent after the latest performance fee), is trading on a 2.2 per cent discount and is yielding 4 per cent.