Latest trust commentary

Market Summary

Small and mid-sized companies (SMIDs) were buoyed by a flurry of new bids. SMIDs were also supported by expectations of a possible turning point in the outlook for domestically focussed companies following a decade of underperformance. The fund outperformed the FTSE 250 (ex IT) index over the period.

Quarterly Overview

A number of holdings were subject to inbound bids. They included investment platform provider Hargreaves Lansdown, which recommended a second improved offer from a private equity-backed consortium, and windows components supplier Tyman, which recommended a bid from a US peer. Meanwhile, following strong first-half results and after rejecting an initial approach soft drinks maker Britvic recommended an improved offer from Danish brewer Carlsberg after the period end. Defence group QinetiQ was another top contributor as full-year results revealed that organic revenues had grown by 14%, reflecting the strong order backdrop for the defence contractors. Oxford Instruments performed well as the market began to discount the new management team’s margin improvement programme at the manufacturer of tools and systems for the research sector. On the negative side, while the interim results of travel retail specialist WH Smith showed good progress with the US expansion they also underlined how new openings are taking time to bed in. Precision measurement solutions business Spectris fell on the back of a profit warning related to disruption around the roll-out of a new ERP system and weaker demand in China due to slowing EV sales. Specialty pharmaceuticals business Indivior drifted ahead of the transfer of its main quotation to the US. Not owning International Distribution Services also detracted as the logistics group was bid for. Homewares retailer Dunelm drifted on no specific news but generalised fears around retailers. These fears were brought into focus after budget footwear retailer Shoe Zone warned on profits due to rising freight costs and a weaker-than-expected sales due to unseasonal weather conditions. 

We sold Redrow following a bid reinvesting the proceeds in peer housebuilder Crest Nicholson where there is opportunity for self-help measures and potential for renewed bid interest (which subsequently transpired following the period end). We initiated a new position in best-in-class facilities management business Mitie, which is set to benefit from strong topline growth and a margin improvement programme. We initiated a holding in travel food and beverage group SSP given its recovery potential and participated in the IPO of computer manufacturer Raspberry Pi for a small stake. The floatation was very well received by markets and we subsequently took some profits. We sold Redrow following the bid and Hargreaves Lansdown as it went back into the FTSE 100 due to the bid interest. We exited manufacturing components company Essentra as we see more upside in other industrial companies.

Investment Outlook

We have turned more cautious given the margin pressures facing many companies, particularly those in the leisure sector with large payrolls. Consumers are at risk of higher remortgage rates and there is concern both among business and individuals about the tax background under a new Labour government. We are focused on companies that can at least maintain their price points as abating inflationary pressures make it harder to push through rises.

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Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

Fund risk considerations - Schroder UK Mid Cap Fund plc

Concentration risk: The company may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the company, both up or down, which may adversely impact the performance of the company.

Distribution risk: As a result of fees being charged to capital, the distributable income of the company may be higher but there is the potential that performance or capital value may be eroded.

Concentration risk: The fund may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the fund, both up or down.

Currency risk: The fund may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.

Gearing risk: The company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in that investment could be lost, which would result in losses to the fund.

Liquidity risk: In difficult market conditions, the fund may not be able to sell a security for full value or at all. This could affect performance and could cause the fund to defer or suspend redemptions of its shares, meaning investors may not be able to have immediate access to their holdings.

Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the fund.

Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.

Counterparty risk: The fund may have contractual agreements with counterparties. If a counterparty is unable to fulfil their obligations, the sum that they owe to the fund may be lost in part or in whole.

Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.